When Should a Business Take Out a Business Loan?

If you’re like most small business owners, you’ve probably thought about expanding your business and paving the way for future growth. And, indeed, there are a lot of very good reasons to take out a business loan. Here are five of them.


Reason #1: Business expansion


Expanding your business is probably the No. 1 reason why business owners decide to take out a loan. In short, there’s simply a point in time when you’ve outgrown your current business location. Business is booming and you can’t keep up with all the demand.


If you’re a restaurant owner, this might mean that you simply don’t have enough table space to satisfy all your potential customers. If you’re a fashion apparel shop, this might mean that your storage area simply can’t keep up with all the inventory you need to order. For every business, “booming” means different things.


But a surge in new business is almost always a signal that it might be time to take out a loan. The extra financing could help you upgrade to a bigger space, for example. Or it could help you hire new employees. As long as you have the sales and revenue projections pointing at continued growth, this could be the right decision to make. If you’re not sure about whether or not it makes sense to take out a loan for business expansion, you can always consult with a company like Small Business Lending Source, which can help you map out your financial projections for the future.



Reason #2: New high ROI opportunities


In the business world, one of the biggest buzzwords is ROI, or return on investment. Simply stated, this means that you are able to make a nice return on any money that you spend. And sometimes high ROI opportunities occur that you’re forced to turn down simply because you don’t have enough cash on hand.


For example, you might run across a unique offer to buy bulk inventory at a greatly reduced price. Or you might find a perfect new retail space that needs a new company to move in immediately. Ordinarily, of course, you’d have to pass on those opportunities. But if you are backed by a new small business loan, you can suddenly take advantage of those high ROI opportunities. Remember – when opportunity knocks, you need to open the door.


Reason #3: Inventory replenishment


Inventory is the lifeblood of any business. The worst thing is to have a “stock out,” when you have empty shelves and pent-up consumer demand. There’s nothing worse than having to tell an excited customer, “We’re waiting to place an order. We should have more of that in a few weeks.” By that time, of course, this customer has moved on to a business that actually has the item in stock.


So inventory replenishment can be a very important reason to take out a small business loan. As they say in business, “Sometimes you have to spend money to make money.” In other words, you may need to spend in advance to get all the necessary inventory,  but then you can “pack them high and watch them fly.”  With all of those additional sales, you’ll easily be able to pay off the original loan.


Reason #4: New equipment needs


Sometimes it’s easy to overlook how important the right machinery, tools or equipment is to the smooth functioning of a business. Some of this equipment is basic IT equipment for the office – such as new computers and new servers. And some of this equipment might be new forklifts for the warehouse, or new heavy equipment for a construction job. In either scenario, a small business loan might be one way to make these purchases affordable.


In many ways, equipment loans are similar to car loans. You wouldn’t walk up to car dealer and offer to pay for a $20,000 car in cash, would you? In the same way, you’re not expected to pay the full purchase price for very expensive equipment. And, just as there are car loans in which your car acts as the underlying collateral, there are also equipment loans in which the equipment acts as your collateral.


Reason #5: Short-term working capital


For any small business, one of the most important considerations is being able to smooth out cash flow. You need to match up accounts receivable with accounts payable. However, that’s not always possible, and that’s what leads to needs for short-term working capital.


For example, say that you have given your clients favorable payment terms of 60 days. This might be the only way you can get this business. But if your own payments are due in 30 days, you can immediately see how there might be a cash flow mismatch. In other words, you are sending out payments every 30 days, but only getting payments every 60 days. To smooth out these cash flows, some businesses opt to get a short-term loan to cover immediate working capital needs.


This is perhaps the trickiest type of loan, though. There’s a big difference between a “cash flow mismatch” and a business that’s just straight up losing money. That’s why lenders have come up with very specific financing mechanisms, such as factoring, to help companies address their working capital needs.



As you can see, there are several very good reasons why your small business would want to take out a loan. However, there’s always a trade-off between risk and reward in the business world. That’s why it’s important to have very accurate financial models in place for your business. You don’t want to be taking on very high-interest debt that might require onerous debt repayment schemes. And you don’t want to be using debt to keep afloat a failing business – that will only complicate matters further and make it harder to pay back a business loan on time.


But there are plenty of good reasons why a rational amount of debt can really turbo-charge the future growth of your business. Most importantly a loan could open up new opportunities that simply were not available before. And, by doing so, you can grow your business in ways that you had never previously imagined.

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