5 Reasons Your Business Needs a Loan

  •    Meredith Wood is Editor-in-Chief at Fundera, an online marketplace for small business loans.

You’ve probably heard the old adage that you have to spend money to make money, and it’s true. If you want your business to grow, you have to be able to invest in the expenses of growth, like equipment, advertising, and property.

The problem is that managing all those costs in addition to the expense of running your business can be tricky, and paying upfront for your business needs is often impossible until your business sees more growth. It’s a circular problem. You can’t grow unless you invest, but how can you invest in your business while keeping money in your business for operational costs?

The solution may be small business loan. While taking on debt can seem scary for small business owners, a loan can help you finance changes in your business that can result in a high return on your investment.

Here are 5 reasons why your business might need a loan:

1. Expansion

Probably the most obvious reason to consider a small business loan is to invest in an expansion opportunity for your business. When business is booming, continuing to grow your business can help ensure that your profits don’t plateau or shrink.

Of course, further growth has many costs, such as advertising, new property, building renovations, and increasing staff sizes, and it’s unlikely you’ll have the cash on hand to cover it all unless you take it from the funds that keep your business operational.

Loans can help you cover the expenses of expanding your business without eating your operational funds, so that you can continue to impress customers while growing your business.

2. Inventory

One of the largest and most difficult to manage expenses in many industries is inventory. The problem is that you have to invest in the products you’ll carry before your customers can buy them and offset the cost. Once you’re operating, you’ll need to continually expand and replenish your inventory to keep up with demand and to provide better options to your customers. This expense is even more difficult when your business requires seasonal inventory, such as winter coats.

By taking out a loan to offset inventory costs, you can stay ahead of trends and customer demand without hurting your cash flow.

3. Cash Flow

Cash flow is always a challenge for a small business, and it can continue to be a problem when you’re dealing with customers who don’t pay for services or when you have unsold inventory that needs to be moved to bring in new products. These issues are even more problematic when you factor in the regular costs of your inventory, staff, utilities, and rent or mortgage.

A short-term loan provides money to be used for your regular operational costs, and can help your business stay afloat when profits are low. By keeping money flowing through your business, you can continue to bring in new customers to drive revenue while making up for other losses.

4. Equipment

Every business has equipment that’s necessary to do the job, such as a machinery, or equipment your customers use, like a treadmill. Equipment is expensive, and it wears down and becomes outdated over time.

Unplanned expenses like the repair or replacement of broken equipment can break your budget, and sometimes running without that piece of equipment isn’t an option. Broken or faulty equipment can also increase your liability and chase off customers who need reliable service, costing you more money in the long-term.

Loans can help you manage the costs of equipment that will allow you do your job and provide a better experience for your customers. They can also help you keep your business up to date with new technology that improves your services and interaction with customers.

5. To Improve Terms on a Larger Loan

If you’re planning on needing a large loan in the future for business expansion or upgraded equipment, it may be smart to take out a smaller loan first, especially if your business doesn’t have a credit history.

The first loan you take out for your business will probably have less-than-ideal terms, because you haven’t built your credit yet, and high interest rates will hurt on bigger purchases that are essential to your business.

One strategy to ensure you get great terms on a large, vital loan is to get a small, easy-to-repay loan before you need a big one. When you pay off the small loan quickly, it may mean that you can strike a better deal when you need a larger loan in the future.

Consider using your first business loan for a small piece of equipment that would make life easier, but won’t break the budget. Then, when you need to purchase something big, you’ll have a strong credit history to help you qualify for better rates.

Of course, no small business should to take on debt that isn’t necessary, but there are times when a loan is the right decision to keep your business afloat or to improve the bottom line. Always weigh the cost and benefits of a loan, but if it has the potential to considerably grow your revenue, it might be time to look at your loan opportunities.

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