3 Reasons Your Small Business May Take Out a Loan
The need for cash arises frequently in small business environments. The need can be due to myriad factors, and it’s important to develop a comprehensive knowledge of your fiscal circumstances to ensure any loan is sustainable. While loans should not be feared — and are both essential to building virtually any successful business, and are important tools for constructing a reliable credit profile — they also should not be treated haphazardly, because repayment takes time and a default can be destructive for your personal and financial life.
With that in mind, below are three common reasons your business may need to secure some form of financing.
1. Purchasing Equipment
Equipment financing is a common means of borrowing for many small businesses. Depending on your industry, you may need to purchase construction equipment, food processing equipment, healthcare equipment, or other machinery.
One question to ask when seeking equipment is whether it makes sense to buy or lease. While buying will almost always be cheaper in the long run, equipment financing for a purchase is still expensive, and generally is only sensible if you have a consistent and long-term need for a given piece of machinery. However, if you do take the purchase route, it’s worth noting that a valuable piece of equipment can be a useful item of collateral for future loans.
2. Funding an Expansion
Financing is also frequently sought by businesses looking to grow. Perhaps you intend to open a second location. This will require funding any renovations, paying for rent or real estate, expanding payroll, purchasing more inventory, and a whole host of other, interrelated costs. Without a loan, growth may be impossible.
Of course, it’s important to consider trade-offs here as well. Simply growing your business will not ensure higher revenue, in part because of a significant growth in costs. Ensuring you’re prepared for the burdens of any expansion loan is essential.
3. Launching a New Product or Service
Many business owners seek to grow by diversifying what they offer. This, too, can take money: you may require funds for research, testing, materials, or promotional costs, among others. A business loan can be a helpful way to make this possible, and allow your business to branch out in what it offers.
In other words, there are innumerable reasons why a small business may need to raise additional capital through a loan. Consider your own funding needs, and ensure that you’re fiscally prepared for the obligations of any loan.