Reasons you should take out a small business loan
Most small businesses must take out a business loan, at some point. Small businesses take out these loans, for a variety of reasons. While there are a number of types of lenders that will loan to small businesses banks are often the first choice. But it must be noted that borrowing money is expensive, for a company, and raises its risk. In addition, to the risk of whatever business you are undertaking, borrowing money introduces another level of risk to your personal financial state. While, taking on debt is one of the forms of financing small business operations, all of the ramifications must be considered seriously. Small business owners should have a clear and concise understanding, of what they are taking on the risk of a small business loan.In order to help you see if you are borrowing, for the right reasons, here are some reasons that companies often use debt financing.
- To purchase equipment- Businesses usually have a couple of choices in regards to the acquisition of equipment. Most of the time they can buy it, or they can lease it. You should keep in mind that there are good reasons, to take out a loan to buy your equipment. One of the major reasons is that you can take a tax write-off, and you can depreciate the rest of the equipment, over its economic life. You can also use the equipment for its life and sell it for a salvage value, if you have bought it.Business experts recommend that in order to know whether it is best to buy, or lease equipment, you should do a cost-benefit analysis before you make the decision. Keep in mind that when a bank makes a loan for equipment, it is usually an intermediate term loan. Intermediate term loans are generally 10-15 year term loans.
- To purchase inventory-Banks will sometimes make loans to small businesses, to purchase inventory. Some small businesses are seasonal in nature, particularly retail businesses, and if a business makes most of its sales during the holiday season, they want to purchase most of their inventory prior to the holiday season. Because of this they may need a bank loan prior to the holiday season, to purchase a large amount of inventory to gear up for that time. It is important to understand that bank loans to purchase inventory, are generally short-term in nature, and companies usually pay them off after the season is over with the proceeds of sales from their seasonal sales.
- To purchase real estate and/or expand operations- If a firm is expanding, then the bank assumes that the firm is successful, and it wants the firm to keep on doing what its doing. This makes it far more likely that the bank will lend money.Expansion generally only happens if the firm is turning a profit, and a positive cash flow, and has positive forecasting numbers for the future. It is important to understand that bank loans, for real estate, are usually in the form of a mortgage. Long-term bank loans are usually 25-30 year term loans, and the real estate is used as collateral.
- To increase working capital-Working capital is the money that small businesses use to manage day-to-day operations. Small businesses sometimes seek out loans to meet their daily operations needs, just until their earning assets are sufficient to cover their working capital needs. Banks will sometimes loan short-term money to small businesses to enable them to get off the ground and grow. However, you should clearly understand that working capital loans may have higher interest rates than, for example, real estate loans, since banks consider them riskier.