When you’re running a small business, funds from a business loan can make a huge difference in your operations. You can use loan funds to fulfill many business needs without interrupting cash flow or tapping into your reserve funds. But are you really considering a small business loan for the right reasons?
You need to make sure you have a good reason for taking out a small business loan. Lenders may find you to be too much of a credit risk if you can’t prove that your loan will be used to improve the business and increase profits so that you can pay it back.
Before you start applying for a loan, you’ll need to make sure the benefit of the loan outweighs the cost. From buying new equipment to easing cash flow problems, expanding your premises, hiring more staff or investing in your business’s growth, here are five good reasons to consider getting a small business loan.
1) You Need New Equipment
Every business needs specific tools in order to provide their products and services. Whether you need to replace or upgrade your company’s equipment, many business loans are available to provide you with the funding you’ll need.
If you use a business loan to buy new equipment and tools for your business, you may be able to deduct the cost of it from your taxes as a Section 179 business expense. If you use your loan funds to buy new equipment, you may be able to sell it for scrap once it becomes old and outdated. However, it may be more cost-effective to lease your equipment, especially if you need to upgrade your equipment often.
2) You’re Having Cash Flow Problems
Every business needs some working capital to manage day-to-day expenses. If your cash flow is in the red, it may be hard to maintain the working capital you need to pay utilities, make payroll, and cover other operating expenses.
A business loan can solve your cash flow problems by giving you working capital to run your business until things pick up again. Whether you’re struggling to get through a slow season, collect on unpaid invoices, or sell some slow-moving inventory, a working capital loan could be just what you need. Interest rates do tend to be higher on these loans, but they tend to be short-term in nature and you can often get working capital loans without putting up collateral.
3) You’re Ready to Expand
Your staff are all working on top of each other, sharing desks and other spaces. The new guy has had to set up his work space in the break room. The restaurant is regularly experiencing long wait times, or the retail shop is getting more customers than can comfortably fit in the store. It’s time to expand to a bigger premises, and a business loan can help you do it. Expansion entails increased costs to rent a new space, renovate it, hire more staff, buy more inventory, and so on. Not expanding when it’s time can cause profits to plateau. You can get a commercial mortgage to fund the purchase of a new property for your business.
4) You Need to Hire More Staff
Your business needs to be adequately staffed in order to operate efficiently, but hiring, training, and paying staff can be costly. When you need more staff to handle a high-traffic period or meet your staffing needs as your business grows, a small business loan can give you the funding you need to recruit, train, and pay more people. A shorter-term loan might be most appropriate for covering staffing needs, especially if you’re hiring new staff to meet increased seasonal demand. You can take out the loan to hire the staff, then repay it with your increased profits from the seasonal activity.
5) You Need Capital to Seize an Opportunity
Let’s say you’re facing a business opportunity, but don’t have the funds handy to take advantage of it. Taking out a business loan could be a smart way to seize that opportunity, as long as the financial benefit of the opportunity outweighs the cost of the loan. For example, you have the opportunity to get a $50,000 contract, but you need $7,000 of new equipment and staff in order to meet the demands of that contract. You’ll still be making a profit if you take out a business loan to buy the equipment and hire the staff you’ll need to fulfill the contract.
No business owner wants to go into debt, but sometimes it’s necessary to grow your business or to get through a slow period. Make sure you’re taking out a business loan for the right reasons, and that you’re able to pay it back in full and on time.