Why Get a Business Loan?

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Why Get a Business Loan?

Your small business may be decades old or newly born. Either way, getting outside financing is often necessary to get your business started, expand, purchase more inventory or just cover daily expenses during a slow time.

The following are some of the most common reasons for business loans and a few tips to remember before applying for one. 

Starting Up

You have a great idea for a business, and need funds to get it going. But it’s not easy to get a loan. For the lender, it’s risky to loan money to a small business that has yet to produce revenues. Traditional banks are wary of loaning to new businesses. But there are some options such as the U.S. Small Business Administration’s microloan program, which offers up to $50,000 for small businesses that can be used for start-up costs.

Alternative lenders, such as BFS Capital, are friendlier to newer business. While traditional banks generally require around three years of records, BFS will loan to companies in existence for nine months if they meet the other qualifications such as a minimum monthly sales volume of $7,000 and a personal credit score of at least 550.

Inventory

To make money, you will need to constantly replenish your inventory. There may be times, such before the holiday season, when you may need to buy a lot of inventory and you don’t have the cash on hand. If you don’t have the inventory, you could lose out on a lot of sales and miss the chance to be profitable.

Before you take out a loan, it is advisable to create a sales projection based on previous sales during the same period. Figure out the cost of the debt and compare it to your total projected sales to see if it makes sense to take a loan. Also remember to err on the conservative side, since sales can vary each year, depending on outside factors such as the national economy.

Equipment

Most small businesses need some type of equipment, from computers to tools to create a product or provide services.

While the latest iPhone or coffee maker can be very attractive, make sure your small business really needs it before taking out a loan. Also consider if it makes sense to purchase or lease equipment. Sometimes leasing is the better choice, particularly for equipment with a short life span. An equipment loan should never outlast the equipment itself. 

Cash Flow

Almost every small business has times when cash flow can be challenging and it becomes difficult to pay day-to-day bills.

During these slow times, a short-term loan or tapping into a line of credit could make sense to help your business stay alive. For example, if you are in a slow sales period right before the holiday season, and you have an opportunity to buy bulk inventory at a discount. Another example could be that your business is selected for a big project and you need more employees to complete it.

Before you take out a loan for these type of expenses, you must be realistic. If you have uncertainties about whether your business is able to recoup the money you borrowed in a relatively timely manner, it may be too high of a risk as the loan repayment may take out too much of your bottom line.

Location Expansion

If your business is outgrowing your current physical location, it may be the right time to move. But remember, this takes a lot of up-front costs, so you may need a loan to do so.

You need to consider how much the loan costs will impact your bottom line to decide if it make sense. It’s imperative to create a revenue forecast for your business in the new location before proceeding to obtain a loan. Also do your research in terms of other businesses in the area where you want to open up, particularly if it’s your second location.


Erica Stone

Erica is a veteran journalist and editor whose experience includes Dow Jones Newswires and the Associated Press. She has written on a variety of topics ranging from sports to complex financial issues. 

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