You’ve probably heard the old saying that you have to spend money to make money. When it comes to running a business, this is especially true. If you want your business to grow, you have to be able to invest in the necessary expenses. To make a list of these expenses would be futile; there are numerous (and seemingly endless) costs to running a business.
Small businesses are caught in an odd area where they need funding to grow, but due to being small, may find it hard to acquire the funding. Perhaps lenders see the business as not profitable enough to repay. Maybe you have just started and simply have no track record yet. Regardless, a small business needs big money.
Covering all the costs in addition to the daily expenses of running your business can be tricky. Paying for your business needs is often impossible until your business achieves more growth. This can be a circular problem. You can’t grow unless you invest, but how can you invest in your business when you’re spending your money on the costs of daily operation? The solution may be a small business loan. Taking on debt can seem scary for small business owners, but a small business loan can help you finance changes that can result in a high return on the investment. Still on the edge about taking out that small business loan? Here are ten reasons why your business should:
Let’s say you have been running your business for a while now, and the building you’re in just isn’t cutting it anymore. Boxes are on top of boxes, storage rooms are busting at the seams, and people are stacked in cubicles like sardines. Or maybe you are getting more and more customers every day and don’t have the room for them anymore. The need for growth is a good problem to have. Unfortunately, it is not a free problem to have.
Expansion costs money. Just because you have to expand does not mean you can necessarily afford it. Sure, profits are up, but so is payroll and countless other forms of overhead. Maybe the hot water tank sprang a leak recently. Regardless, if you are faced with a similar situation, the best advice you can take is to expand. If you can’t afford it, you are not alone.
As a matter of fact, the most common reason small businesses take out business loans is for expansion. This could mean your business is acquiring another facility, or it could mean you are expanding within a business site. Either way, small business expansion usually requires outside funding. The major advantage here is that the expansion itself can pay for the loan. Think about it. If you take out X amount of dollars to expand, and then because of the expansion you make X amount of dollars, it’s essentially a wash! This is a classic example of it taking money to make money.
As a nice bonus, most lenders tend to love when this expansion the reason for a small business loan. If the business is growing to the point of needing to expand, it is a sign the business is successful. Rarely do businesses expand unless there is profit and a promising projection of more profit. This scenario greatly increases the chances of being approved.
Plain and simple, sometimes a business just needs more money. Working capital is the money a business uses for daily operation. Working capital is the difference between your total assets and your total liabilities. A business can be very successful but still have a low working capital. Sometimes customers do not pay for services, or there is leftover inventory that needs to move so more can be brought in. Then, factor in your overhead costs like staff, utilities, rent, etc. If this happens, but you know your business is successful and that it would just take a small sum of money to get back to profitable, it’s time for a small business loan.
A working capital cycle is however long it takes a business to turn working capital into actual cash. The balance of incoming and outgoing payments is crucial to keeping this cycle short. The shorter the working capital cycle, the more likely a lender is to approve you for a loan.
Each business needs specific equipment in order to function. Also, especially in today’s day and age, equipment constantly needs to be technologically updated. Aside from being outdated, equipment also fails. These things are never planned. Maybe an update for a piece of equipment is absolutely necessary and also expensive. Continuing with the restaurant theme, maybe three pizza ovens break down overnight. Maybe you don’t even have the necessary equipment yet!
These types of equipment needs often require outside funding. Small business loans can help manage the costs of equipment so that you can focus on running the business and provide a better experience for your customers. Loans can also help you keep your business up to date with new technology that improves your services and overall customer satisfaction.
Equipment isn’t the only physical thing businesses need. Inventory is often one of the largest expenses business owners face. The ultimate ‘trick’ is to purchase inventory your customers will demand before they demand it. This means keeping up with new trends, whether your business is travel, fashion, toys, massage, etc. Being with the times and being modern is a requirement in today’s America. This rings even more true for businesses that provide seasonal goods or services. Holidays and weather changes being about new demands, and sometimes keeping the inventory on hand is incredibly expensive.
Financial institutions recommend creating sales projections alongside debt projections to determine whether or not an inventory loan would work for you. Using the past few years for data will help project your current year, so pay attention to sales trends accordingly. (For example, if you own a clothing store in a seasonal part of the country, stock up on winter clothing prior to the start of winter). A business loan will help offset the costs of inventory and allow you to focus on the day to day operation of your business.
Improving your business credit score is always a good idea. Small business owners and startup business owners know this best. It can be very difficult for such businesses to be approved for large loans due to either having poor credit or none at all. Whether it’s to improve a lower-than-wanted credit score, or to build better credit in planning for larger loans later, taking out a business loan will help. Bear in mind that the first loan a business takes out will most likely have higher rates than wanted. This is because your credit hasn’t been built yet. Take out a small business loan, pay it off, and watch your credit score go up.
Taking out a loan also starts the beginning of your relationship with your lender. The better this relationship is, the more likely you are to get desirable terms and conditions for future loans. Regarding this tactic, financial institutions recommend getting a small and easy to pay loan at first. Paying this loan off will improve your credit, improve your relationship with your lender, and ultimately improve the terms and conditions of your next loan.
Let’s tie this back into equipment. Consider using your first small business loan on a piece of equipment that won’t break your budget. This allows you to stay ahead of the technology aspect (see above) while also building your credit score, which ultimately leads to better terms for the next loan. Think big picture, not just big. Start with affordable loans, and then once your score is good and your lender-relations are good, go for that big loan!
Good employees make a good business. There comes a time in every business where more staff becomes a necessity. Maybe you’re expanding, maybe it’s a seasonal flux, maybe five people just quit in a row. Hiring and training new staff is much more expensive than many people might think. Not only do you spend the resources on the new employees, you have to take away productivity time from other staff in order to train and/or supervise.
Using a small business loan to cover the costs of new staff ensures payroll will operate smoothly, which in turn will keep your employees happy. Maybe this can allow you to offer them incentives and boost productivity. The cost of the loan can easily be repaid with the profits of improving your staff.
This is not so much a reason to take out a small business loan, but something very important to remember if and when you do take out a small business loan. Because the loan is backed by the business itself, as long as the loan does not exceed the net worth of the business, you will not owe any money on default. Okay, that was a mouthful.
Your business is worth $100,000 total, completely liquidated. You take out a small business loan for $20,000. Two months in, you default on the loan. You as an individual will not owe the lender $20,000. Because the business has sufficient worth to cover the cost of the loan, the business is used. This can be in capital, equipment, or even in ownership of the business. This does not always happen, but can be agreed upon as a term of the loan oftentimes.
Sometimes exciting business opportunities arise that you feel you simply cannot miss out on. These opportunities might include being able to purchase inventory in bulk at a discount, finding a new space at an amazing price, or seeing a sale on IT or other equipment you might need. During times like these, financial institutions recommend you think about the pros and cons of taking out a loan for opportunity. However, the revenue stream that may come from financing such an opportunity may be just what your business needs to grow.
Sometimes it’s just relieving to have a nest egg built up in the event of an unplanned disaster. Instead of waiting for equipment to break, you could take out a small business loan and sit on it, therefore having the funds if and when this time comes. Life happens. In business life, this usually means expense. The need for fast cash can be satisfied by having an emergency fund built up. Not to mention, doing this by means of a small business loan adds the benefits of building credit and building your business.
Good luck with your small business loan!
Chris Fuller went to the University of South Florida and has worked in the financial sector for over 20 years. He has extensive experience in all aspects of personal and small business lending, from personal loans, equipment finance to cash flow based solutions for small mom and pop businesses, and large corporations.