A loan could turn your business dreams into reality. Find out 8 excellent reasons for entrepreneurs to take out a business loan here.
About 33 percent of Americans want to start a business but don’t have adequate startup capital.
29 percent of small businesses fail because they run out of cash. Whichever way you slice these stats, you’ll reach one conclusion: you need enough money to start and run a business.
If you’re facing any of these problems, you’re probably thinking of taking out a business loan? Maybe you have some reservations about loans, but they're an ideal way to fund your business.
Here are good reasons to take out a business loan.
If you are one of the people who have an entrepreneurship dream but lack the funds to make it a reality, a business loan is a good source of startup capital. Although most newbie entrepreneurs shy away from getting a business loan because lenders are more likely to reject their applications, you have every reason to apply. Just because they’re being turned down doesn’t necessarily mean your application will be rejected.
The secret lies in drawing up a solid business plan. Any lender will want to know whether your business has the potential to be successful before making a lending decision. A business plan is what you need to convince them.
Do you already have an existing business? Thumbs up! While starting a business is one of the biggest and hardest steps, expanding it isn’t any easier. Maybe you own a restaurant and want to open up a couple of new locations or you want to bring in more people to your team. Or you want to get a bigger office space to accommodate your growing team.
Regardless of your specific situation, expansion can gobble up a lot of money. If you aren’t able to raise expansion capital on your own, don’t shy away from taking out a loan. Banks and other lenders are always looking to invest in growing businesses. However, when borrowing money for expansion, it’s important to have a good expansion strategy. Expanding too fast, for instance, can be a costly mistake.
Let’s say you run a small manufacturing plant. One of your biggest expenses is equipment acquisition and maintenance. If you’re not well-funded, you might not be able to afford the equipment. In this case, you can go in for a loan to purchase the equipment.
What’s more, getting approved for an equipment loan is much easier than securing other types of loans.
Why? Equipment loans, also known as equipment financing, are secured. As such, they present a lower risk to lenders. If a borrower defaults on the loan, the lender can seize the equipment and sell it off to recoup the loan balance.
If you’re in the business of inventing or innovating things, at some point you’ll need to file a patent (if you haven’t already.) This will help protect your invention from being pirated by other people. Unfortunately, the cost of filing and securing a patent can be out of your reach, especially if you’re a small business owner. Sure, the cost of filing a patent alone is about $300, but there’s a lot that goes on before the actual filing. You’ll certainly need to, among other things, hire a patent attorney.
On average, the entire process of filing a single patent costs about $3,000. If you need multiple patents, the cost can easily run into tens of thousands of dollars. Considering the importance of a patent, taking out a business loan to fund the process counts as an excellent reason. There’s a potential problem, though. Ideally, when you take out any loan you must have the means to repay it. The money that goes into securing your patents won’t necessarily turn into profits unless you’re going to sell the resulting product. Even then, this can take a while.
As such, when going in for a business loan to fund a patent application, ensure you’ve got a steady income, either from your regular job or business profits. If you don’t, you could default on the loan, which will hurt your credit and ruin your relationship with the lender.
When you’re starting a business, you’ll be worried about your product’s market demand. What if potential customers don’t want to buy it? It turns out that’s not the only cause of worry. What if your stock runs out and you don’t have enough money to replenish it?
For starters, it’s a good sign when your stock runs out. It means the market is loving your product. However, if you’re unable to fulfill new orders because your inventory is out, you could lose customers to your competitors. If you’re in this situation, don’t hesitate to apply for a business loan. In fact, if you have purchase orders from your clients, most lenders will readily give you the money you need to buy the inventory.
If an emergency were to strike your business, will you be able to keep your operations going after everything settles? If not, it’s probably because you don’t have adequate working capital. Working capital is the money you need to finance day-to-day operations as well as respond to unexpected expenses. At any given time, you should be able to pay for utilities such as electricity and water and take care of salaries and other expenses.
If your business doesn’t have enough working capital, you can take out a working capital loan. This can be a term loans (you get the money in a lump sum and pay it off in monthly installments) or a business line of credit (you access the money whenever you need it). Both credit facilities have their pros and cons, so you need to find the one that best suits your business. If your working capital is large, for example, it’s better to go for a term loan. Terms loans have higher loan limits than business lines of credit.
You know about your individual credit score. But did you know your business also has a credit score? If you’ve never taken out a business loan before, it’s understandable that you might not be aware of business credit scores. When you take out a business loan, it’s your business/company that needs the money, even if you’re a solo entrepreneur. Lenders look at the business’ credit score to determine its creditworthiness and make lending decisions.
Just like taking out a personal loan to build your personal credit score, you can also take out a business loan to build your business’ credit score. You’re probably wondering, “How will I get a loan if my business doesn’t yet have a credit score?” In truth, banks and other traditional lenders will reject your loan application if your business doesn’t have any credit. The good news is there are alternative lenders who specialize in making loans to businesses with bad or no credit.
You can also go in for a secured business loan. Because you have to provide collateral, such as a house or car title, lenders don’t put much emphasis on your business’ credit score.
Sometimes clients take a couple of days, weeks, or months to pay for the products or services you offered them. There’s nothing wrong with this, but it can affect your cash flows and even leave your business in a cash crunch.
Picture this. You have $10,000 worth of unpaid invoices, which is due at the end of the month.
Then, suddenly you need $3,000 to settle an unexpected expense. You look at your working capital account only to find $1,000 in there.
What do you do? Call up your clients and ask them to pay up ASAP? Nope, that isn’t good for client relations. There’s a good solution. Take out a business loan in the form of accounts receivable financing! Most lenders will give you up to 100 percent of your accounts receivable – at a fee.
Higher interest rates and the possibility of defaulting can discourage you from getting a business loan. But as we have demonstrated, there are excellent reasons to take out a loan for your business.
What’s more, this list isn’t conclusive. You can get a business loan for any reason that makes financial sense..