They say it takes money to make money, and they aren’t wrong. Nowhere is this more apparent than in the world of business, where capital is the lifeblood crucial for growth. It’s therefore no surprise that, according to the U.S. Small Business Administration, young firms get roughly three-quarters of their funding via borrowed money.
While it’s true established businesses are more likely to depend on reinvesting profits and using bank credit to fuel growth, they all started somewhere and they probably had to borrow money when they did. Below are the most common reasons why small business owners will more than likely apply for a small business loan at some point or another:
- Cash flow management
Most small businesses fail to carry out cash flow analysis consistently. The resulting effect is the inability to intercept the problems without predictions on cash flow. Moreover, the situation is normally steered by customers who fail to honor their promises or if you have stock which you ought to create room for other products. A business loan is often the salvation when businesses are entrapped into this form of predicament. The injection is vital in keeping a business afloat during losses and provides the money for frequent operational costs. The market is also in a position to expand its customer base.
- Business expansion
Presumably, the most profound reason for considering loans is for business expansion. Financial institutions tend to approve such loans quickly as they perceive the businesses to be successful hence the need to maintain a close a business relation.
Expansion of businesses carries with it additional overheads including publicizing, re-branding, new property and increasing the number of staff. Unless you have the funds to cover the activities, you are predisposed to loans as an alternative. The expenses of expanding a business will be covered adequately with loans as the business continues to attain customer satisfaction.
- New equipment
Every business needs equipment that is relevant to the services and products it is providing. Most equipment is expensive and will be out of use once they wear out. However, companies are presented with a couple of new equipment acquisition choices. Purchasing or leasing equipment are the two primary options. Cost-benefit analysis is always critical when deciding equipment obtaining option.
Business loans will assist to procure the new tools and enable the business owner to maintain customer experience as it continues to meet their expectations.
- Inventory
Small-scale businesses especially the retail industry experiences the recession and boom periods. In anticipation of the peak periods of inventory purchases, the business will require loans for product investment. The funds will assist in bringing a variety of the trending products for customers to choose from.
- Increasing working capital
Small businesses often require loans to attain their day-to-day operational costs. This may proceed until their resources are ample to make up for their working capital requirements. The loans are in most cases intended for the success of the institutions and start paying back after stabilizing. The working capital loan is always perceived to be risky compared to other forms of loans obtained from lending institutions, hence the higher interest rates.