The decision to apply for a business loan is a significant step. Before seeking funds for the business, a full evaluation of the condition of the business should be made. Perhaps there are othe ways to accomplish the same goal. Any good advisor or loan officer should honestly assess the situation and determine what kind of loan is necessary and how much. Below are the 5 most common reason businesses will need to borrow.
1. Purchase Real Estate and Expand Operations
Banks are likely to loan money to existing firms that want to purchase real estate to expand their operations. If a firm is expanding, then the bank knows the firm is successful and it wants the firm to keep on doing what it’s doing. Expansion generally only happens if the firm is turning a profit and a positive cash flow and has positive forecasting numbers for the future. That is a scenario that makes a bank likely to approve a loan. Bank loans for real estate are usually in the form of a mortgage. Long-term bank loans are usually 25-30 year term loans. The real estate is used as collateral. Business expansion need not be limited to purchasing real estate. It could also include enlarging or improving current space.
2. Purchase Equipment
Businesses have a couple of choices with regard to the acquisiton of equipment. They can buy it or they can lease it. There are good reasons to take out a loan to buy your equipment. You can take a tax write-off of $25,000 the first year you earn the equipment and depreciate the rest of the equipment over its economic life. You can also use the equipment for its life and sell it for a salvage value. In order to know whether it is best to buy or lease equipment, you should do a cost-benefit analysis before you make the decision. When a bank makes a loan for equipment, it is usually an intermediate term loan. Intermediate term loans are generally 10-15 year term loans.
3. Purchase Inventory
Banks sometimes make loans to small businesses to purchase inventory. Some small businesses are seasonal in nature, particularly retail businesses. If a business makes most of its sales during the holiday season, they want to purchase most of their inventory prior to the holiday season. They may need a bank loan prior to the holiday season to purchase a large amount of inventory to gear up for that time. Bank loans to purchase inventory are generally short-term in nature and companies usually pay them off after the season is over with the proceeds of sales from their seasonal sales.
4. Increase Working Capital
Working capital is the money you use to manage your day-to-day operations. Small businesses sometimes need loans to meet their daily operations needs until their earning assets are sufficient to cover their working capital needs. Banks sometimes loan short-term money to small businesses to enable them to get off the ground and grow. As the business grows and their own assets enable them to earn money, they can repay the working capital loan to the bank. Working capital loans may have higher interest rates than, for example, real estate loans, since banks consider them riskier.
Many businesses will try to increase their customer base by advertising. Advertising can include paper and magazine ads or television and radio advertising. In the internet age, a marketing budget should include web page development, landing pages, paid advertising through social media or google. To obtain funding for marketing, the lender should be provided with projections to show how increased marketing will increase business revenue.
Of course, there are many other reasons to need a business loan. Whatever the reason, a plan should be developed to understand the need for the money, how it will benefit the business and how to go about getting the funds.