All opinions are welcome when you announce that your business is considering a loan. All opinions will range from those who are skeptical to those that have experienced the worst.
Even though not all business reasons can be considered good reasons to borrow money, this doesn’t negate the fact that there are some good ones. These are four reasons why you might consider applying for small business loans.
1. You are willing to expand your physical footprint.
Your cubicles have exploded and your assistant had to move into the kitchen. It’s possible that you have outgrown your office. You may also have a restaurant, retail store, or other business that has more customers than the space you have.
This is great news. This indicates that business is booming and you are ready for expansion. Your business may be ready for expansion but that doesn’t automatically mean you have the funds to make it happen.
You might need a short-term loan to finance your big relocation. No matter how big the move is, it will have significant up-front and overhead costs.
Before you decide to commit, make sure that you measure the revenue growth potential from expanding your space. You could still cover your loan costs while still making profit. For a better understanding of how the move might impact your bottom-line, you can combine your current balance sheet with a revenue projection. Also, if you are looking for a second retail location to expand your business, do some research on the area where you intend to open a shop.
2. You’re creating credit for the long-term.
If you intend to apply to larger-scale financing for the business over the next few years, it may be possible to start with a small, short-term loan to increase your business credit.
If both the owners and the business aren’t able to show strong credit records, they may not be able to qualify for larger loans. You can build your business credit by getting a smaller loan and making timely payments.
This tactic can help you develop relationships with specific lenders. This will allow you to reach out to them again when you are ready for a larger loan. This is where caution is needed. Don’t borrow money you don’t have the means to pay. Even one late payment could affect your ability to get future funding.
3. Equipment is crucial for any business.
For financing, it is often a simple decision to buy equipment that can enhance your business offering. If you want to purchase machinery, IT equipment, or any other tools necessary to create your product, or perform your service, then you will need a loan to finance it. Equipment financing allows you to use the equipment as collateral, much like a car loan.
Prior to taking out equipment loans, ensure you separate the needs and the wants from your bottom line. Yes, employees will love a margarita bar. It may not make the most sense for your business, however, unless it is an investment in a Mexican Cantina.
4. You need to buy more inventory.
Inventory is one of your biggest expenses. The same goes for equipment purchases. You must keep your inventory up-to-date with new, high-quality products. This can be difficult if you have to purchase large quantities of inventory before getting a return.
There will be times when your seasonal business requires you to purchase large amounts of inventory. Slow seasons tend to precede tourist season or holiday seasons. You will need a loan before you can make a profit.
A sales projection is created based on sales from past years in order to assess whether this would be a financially wise move for your business. Calculate the amount of the debt, and then compare that number with your total sales projections to determine if you are making a wise financial decision. Remember that sales figures are subject to change year-to-year so be conservative and use multiple years in your projection.