It is reported that 33% of small business owners either struggle or fail because of a lack of capital . This is often avoided, or curtailed, by the business taking out a small business loan. A small business loan is one of the key methods that many businesses use to initially fund their venture. They are essential in providing an influx of capital. They come in many forms, from the traditional commercial banks, to peer-to-peer lenders, from community banks to online lenders.
While they are incredibly advantageous for new businesses, they do mean debt. So while new businesses should seriously consider a loan, they should also consider interest fees and other costs when making their decision. It’s important for startups to understand exactly how much they need to borrow, and what loan will fit that need. They need to do their research on the terms that different lenders offer.
But when is the right time to take out a loan? Below is a list of reasons that small businesses should take out a small business loan.
Businesses often need a substantial, strong credit history to report when applying for larger-scale financing.
In order to do so, small businesses often proactively take out smaller loans so that they can build their business credit. Making regular, on-time payments on a smaller loan will help build business credit when larger-scale financing is needed.
This will also help build a relationship with the lender, so that it is easier to receive a bigger loan in the future.
This comes with risks, however. If you are late with payment on a smaller loan, you may harm your chances of qualifying for future, larger funding in the future.
Hiring staff is essential in keeping your startup afloat and growing. If you are just starting out, you’re probably working with a small team that may have knowledge and expertise gaps that need to be filled. Staffing is essential for this.
Small business loans or cash advances can be essential sources of funding for the advertising of new roles, the often-expensive hiring process, and the onboarding and training of new personnel.
Read also: 5 Ways to Get a Small Business Loan.
Spending on inventory is a necessary part of any new business, especially a product-focused business. You need to keep up with customer demand by keeping your inventory fully stocked.
Inventory can be a difficult expense to configure, especially during times when you need to purchase a lot of inventory before you see any profit. Small business loans can help you buy this inventory, and keep your shelves stocked, before you see a return-on-investment.
Equipment can be expensive, especially at a time when software and hardware can become outdated or obsolete pretty quickly. Purchasing equipment to maintain and improve your startup venture can put a serious dent in your budget.
This is why small business loans are essential for the purchasing and maintenance of equipment. This is especially true if your business needs specialized equipment to function properly.
An added bonus to an equipment loan is that, like a car loan, the equipment that you purchase can often function as collateral for the loan itself.
But be stringent. Only use an equipment loan for what you really need. Don’t waste that money on potentially frivolous or unnecessary equipment.
Read also: The 10 Best Business Loan Lenders for Fast, Easy Approval.
If your business is booming, and you need to physically expand operations, whether that is through the purchase or rental of new office or warehouse space, a small business loan can help with that.
Expansion into new space can mean the business can scale up and therefore generate more profits. But it comes with a lot of new costs. Small business loans can cover that cost. But make sure that the books are balanced and that your revenue projections line up with the costs of expansion.
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