Why would your business need a loan? Anyone who has ever opened their own business might laugh at the question because there are so many answers. Unless you are already wealthy and can pay for everything upfront, your only option for starting and running a business is to get one or several loans to take care of business problems and necessities. Take a look below to see some of the most common reasons businesses need loans.
Starting Your Business
When anyone is planning to start a business, they should do extensive research and find out from any source available what kind of funding will be necessary, and what unseen financial problems could occur. It is a common death of startup businesses to jump in with inadequate funding only to find themselves cash strapped, broke, or in unrecoverable debt. Instead of struggling and stressing to suddenly find funding for a new business, it’s better to secure funding for those issues present themselves.
Growing Your Business
Like any business, when you yourself are the only one making deals or sales, there is a limit to how many sales you can make. Therefore, you’ll have limited profit potential unless you change something in your business. These changes can include hiring more staff and hopefully increasing your sales, relocating to a hotter market than where you are currently located, expanding nationally or internationally, increasing your number of products or services, or selling products with a higher profit margin. However, as your business grows, your business will be making either more sales or more valuable ones using one or more of these tactics.
Purchasing Needed Assets
As a business grows, it will inevitably need more assets. That can be in the form of equipment, vehicles, space, inventory, personnel, upgrades, and a variety of other necessary assets needed to grow business. If the business tries to purchase some of these outright, it can be too financially stressful on the business. Making significantly lower payments on a monthly basis is a much more financially logical choice for a growing company.
Increase Your Business’s Cash Flow (Working Capital)
Businesses typically have a consistent outflow of operating expenses including materials, labor, and overhead. Overhead usually includes rent or mortgage, utilities (electric and water), and staff. All of these expenses need to be paid, and a decreased cash flow can be problematic. Cash flow problems can be caused by unsold inventory, which can prevent products from being brought in. When this happens, the unsold inventory is often sold at a discounted rate to both remove it from storage and retain any kind of cash flow, even though it is less than what is necessary.
Decreased cash flow can also come from customers who are late on their payments or simply stop making payments to your business. Cash flow problems can quickly become urgent for your business and cause you to look for an outside source of funding. A few loans a business can get to address cash flow problems include a merchant cash advance, short-term loan, asset-based loan, equipment financing, and a business line of credit. Cash flow is probably the most common of all the reasons businesses need loans.
Advertising and Marketing
For some reason, advertising and promotion are often overlooked or underestimated. Word of mouth is great if it happens, but you cannot always depend on that. If no one knows who you are, what you sell, or where you’re located, you probably need to do some type of advertising and marketing. There are niche marketers that will work with you to cater to your specific business and stay within your funding capabilities. But if you have neglected advertising and marketing, you may need to take out a loan to cover those expenses. Like anything else business-related, it takes money to make money.
Raise Credit for Future Needs
Have you ever known of an individual purchasing a TV or bedroom suite just so they can make payments and build credit? Businesses often do the same. They will start with a smaller loan to pay off, build credit, and then get a larger loan for other needs. Each time they pay off a loan with timely payments, their credit goes up. Sometimes businesses don’t even need a loan for these products, but they do need more credit for a larger future need, like an industrial vehicle or a building large enough to house their business. When a lender sees a business taking out loans and making all the payments on time, they will be more likely to accommodate those larger loans for the future as they build a good working relationship with their client.
These are just some of the reasons businesses need loans. All businesses are different, and owners have different needs to cover their current or future expenses. Unless a business owner is independently wealthy or sells the perfect product or service that requires no up-front costs for overhead, a business will likely need to take out a loan at some point. Does your business need funding? Check out the options at Affinity Beyond Capital (ABC) for your business loan needs.