5 Reasons You Might Want To Take Out a Business Loan

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Small business loans can provide you with funding to meet a variety of needs, from covering unexpected expenses to purchasing new equipment to funding large-scale expansion projects. There are different loan options you can choose from but they all have the same purpose: to help you achieve your financial goals. 

Taking out a business loan does mean taking on debt, however. So it's important to understand how much you'll pay in interest and fees to determine your potential return on investment. There are several reasons why you might want to take out a business loan.

Key Takeaways

  • Small businesses can use loan funding to meet a variety of needs without having to tap into cash reserves or drain cash flow. 
  • Some of the most common uses for small business loans include purchasing real estate or equipment, expanding operations, and stocking up on inventory. 
  • When comparing small business loans, it's important to consider your needs in order to select loan options that are best suited to your goals. 
  • Business owners can compare loans from their bank, other local or big banks, credit unions, and online lenders to find the best option.
01 of 05

To Expand Operations

If you run a traditional brick-and-mortar business, expanding into a new location could help you to scale up and generate more revenue. In that case, you may need to seek out a real estate business loan to buy or build new business premises. 

Banks are likely to view real estate loan applications more favorably when the business is turning a profit, has a rising cash flow, and has positive forecasting numbers for the future. Bank loans for real estate are usually in the form of a mortgage. 

Long-term bank loans will use company assets as collateral and will require monthly or quarterly payments from profits or cash flow. The loan term can run anywhere from three to 25 years and will have an interest rate associated with its repayment.

Note

If you're interested in Small Business Administration (SBA) loans for expansion, note that the SBA guarantees loans but does not make them to businesses directly.

02 of 05

To Replace or Upgrade Equipment

You typically have two choices when it comes to acquiring equipment: buying or leasing. Leasing may be preferable in some cases, but in others, it may be better to own your equipment outright. 

If your business relies on specialized equipment, small business loans can help you replace it if it becomes outdated or purchase critical pieces of equipment you might be lacking. The IRS allows you to deduct the cost of equipment as a Section 179 expense. The Section 179 deduction limit is $1 million, with a phase-out limit of $2.5 million.

Equipment you buy for the business can be sold for salvage value when it's outdated or no longer functional. A cost-benefit analysis is necessary to determine whether it's better to buy or lease equipment for a given company. 

Note

Repayment terms for equipment loans are often tied directly to the useful life of the equipment being financed.

03 of 05

To Purchase Inventory

If you run a product-based business, inventory is a necessary expense. There may be times when you come across inventory at a discounted price or you need to bulk buy ahead of the busy season. In either case, a business loan can help you to keep your shelves stocked.

In that case, you might explore your options for taking out short-term loans. These are loans that are generally repaid in less than one year. To get approved for a short-term loan with your current bank, you may need to have a good banking relationship.

Making payments on time and holding a positive balance in a checking or savings account are both ways to build trust with a bank. Keep in mind that bank loans to purchase inventory are typically designed to be short-term in nature. So you'll want to formulate a strategy for repaying them quickly, which may include using proceeds from seasonal revenues. 

Note

If you'd like to have ongoing access to capital for inventory purchases, you could consider opening a revolving business line of credit in place of a loan.

04 of 05

To Bolster Cash Flow

Working capital is the money you rely on to manage day-to-day business operations and it's central to maintaining positive cash flow. Small businesses may take out a loan to satisfy operational costs until their earnings reach a certain volume. If the debtor has good credit and a solid business plan, a bank loan can offer short-term money for a business to get off the ground and grow. 

Working capital loans generally have a higher interest rate than real estate loans because banks consider them riskier; if the business is mismanaged at a crucial time during its infancy, or if the earning assets of the business never generate a profit, the company will face bankruptcy.

05 of 05

To Hire and Train New Staff

Staffing can be critical to keeping your business running smoothly, especially if you have higher traffic during the summer months or the holiday season. Small business loans can provide you with funding to hire new staff, train them, and cover the added payroll costs. 

For this type of financial need, a shorter-term loan might be more appropriate. If you're hiring seasonal employees, for example, you could get a loan with a six-month term, then use the proceeds from seasonal sales to pay them off. 

You could also use a small business loan to create incentives to help retain your staff. For example, you might borrow money to fund a company retreat that's focused on improving training and facilitating communication, while also giving your employees a chance to relax. The payoff comes when those employees return to work energized, motivated, and committed to sticking with you for the long-term. 

Frequently Asked Questions (FAQs)

How do you get a business loan?

Getting a business loan starts with understanding what lenders look for, in terms of your creditworthiness, collateral, and financial background. It's also important to understand how much you need to borrow and what types of business loans exist, so you can choose an option that fits your needs. You can compare loan terms from different lenders to narrow down the possibilities.

Can you get a business loan with bad credit?

It's possible to get a business loan with bad credit and there are lenders that specialize in working with business owners with a less than perfect credit history. You may be required to offer collateral or sign a personal guarantee in order to get a business loan with bad credit. The interest rate and fees you pay for a bad credit business loan may be higher compared to a borrower with good credit.

Updated by
Rebecca Lake
Rebecca Lake has over a decade of experience researching and writing hundreds of articles on retirement, investing, budgeting, banking, loans, and more. She has been published by well-known finance brands including SoFi, Forbes, Chime, CreditCards.com, Investopedia, SmartAsset, Nerdwallet, Credit Sesame, LendingTree, and more.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. U.S. Small Business Administration. “Terms, Conditions, and Eligibility.”

  2. U.S. Small Business Administration. “Loans.”

  3.  IRS. “IRS Issues Guidance on Section 179 Expenses and Section 168(g) Depreciation Under Tax Cuts and Jobs Act."

  4. OnDeck. “Short Term Loans for Small Business.”

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