Why firms need financing can vary, from expanding locations to hiring staff to financing renovations and more.
Find out additional reasons why you might seek a loan for your business and what to consider when you’re in search of capital.
What Are Business Loans Used For?
Many small business owners obtain financing at one time or another. In 2020 alone, more than 42,000 Small Business Administration 7(a) loans were approved, totaling more than $20 billion.
Here are a few common uses of business loan proceeds:
Starting a Business
Although times are certainly different these days as a result of the pandemic, in the U.S., businesses opening up shop for the first time typically run the gamut of several hundred thousand each year.
Being major contributors to the U.S. economy and employment doesn’t come easy, though, and many startups don’t make it past the first year. It can be a challenge to cover startup costs without the proper financial backing. That’s why entrepreneurs just starting out often seek financing.
Running a Business
Depending on their needs, many small business owners seek long-term or short-term loans when they lack business capital. Loan programs are available to finance unexpected costs that often accompany running a business or to maintain operations during a slow period.
Expanding a Business
You’ve heard the phrase, “it takes money to make money.” If you’ve established yourself in your industry and gained brand recognition, it could be a good move to keep building on what’s working.
At this stage, some business owners prefer to use “other people’s money” (e.g., financing) instead of tapping into their own reserves.
8 Business Loan Reasons That Come to Mind
Whether you’re just starting out or have been in operation for years, there are many good reasons to get a business loan. Even small business owners dating back to early civilization would agree. After all, Mesopotamian farmers would borrow seeds to cultivate their fields.
Fast forward a few thousand years. The reasons might have changed but the need to nurture growth and sustain production is still very real.
Here are 8 reasons why funding is important for a business:
1. Pivot Course
You’re no stranger to business and you’re prepared to persevere amid COVID-19. But persevering in 2020 and 2021 is requiring many veteran entrepreneurs to change the status quo.
When you’re looking to shift gears and take your company in a new direction, that’s as close to starting a business from scratch as you can get. Needless to say, pivoting often requires capital.
2. Bolster Your Online Presence
Just when you thought ecommerce couldn’t grow much more, lockdowns and coronavirus mitigation initiatives have led to an even greater surge in online shopping. If your business didn’t have a web presence before, now is the time.
Perhaps you’re looking to improve your website (or create one if you haven’t already) or build an online store. Or maybe you’re interested in increasing your online advertising. Whatever the case, this is a pivotal time for many, one that can come with a price tag that may be out of reach without backing.
3. Buy Equipment
Sometimes to run your business or grow, you need a new piece of equipment, technology or machinery. This could be a welder for an auto shop, a bus for a preschool or even a tractor for a farm.
Often with equipment financing, the item you’re using the funds to purchase serves as collateral for the loan. In some cases, when you’re purchasing equipment with a loan, you could fund up to 100% of the item’s value.
4. Purchase Inventory
Along the same lines, purchasing inventory is another reason many business owners apply for financing. Maybe you’re stocking up to prevent shortages or interested in purchasing new product lines to appeal to more customers.
Whatever the case, inventory financing or another loan type could help you cover the cost of a bulk purchase or restocking expense.
5. Cover Operating Expenses
Many business owners turn to financing to help with operating expenses, including advertising, payroll, rent, utilities and inventory costs. While there are many financing options out there, some entrepreneurs turn to working capital loans for a one-time infusion of cash.
For those seeking a flexible cushion that can be accessed as needed, a business lines of credit is another popular alternative.
6. Pay for an Emergency Expense
You might consider taking out a small business loan for an “uh oh” moment. Costly emergencies that come up out of the blue can put a damper on business operations. Sometimes you just might not have enough money in savings to cover an unexpected expense.
Alternative online lenders are known to offer fast emergency financing when you need it.
7. Consolidate Debt
If you have multiple outstanding debts, you might try to take a loan out for the total sum you owe and pay them all off. Debt consolidation could be particularly helpful if you could secure a lower interest rate and more favorable repayment terms.
Additionally, instead of owing multiple creditors, you’d manage a single business loan, routine installment payment and repayment term instead. This could help you stay organized and on top of your repayment schedule.
8. Finance Real Estate Changes
Use loan proceeds to pay for construction projects or renovations that might be necessary to revamp your existing location or open another business front. You also can use a loan to purchase a building or lease a new space. Small business financing, such as an expansion loan, can help you remodel or move so you can maximize your reach.
Need Funding? Questions to Consider
Why do business firms need financing? According to the U.S. Chamber of Commerce, competition is increasing for small business owners around the country.
With many businesses vying to remain top of mind with customers, it’s no surprise that nearly 1 in 3 say they have more competition now than they had at the start of 2020.
Whether you’re seeking a loan to survive or thrive, you have options when it comes to getting small business funding. From new technology to real estate, payroll to inventory and more, financing can help you cover expenses or investment opportunities that surface, anticipated or not.
Be sure to ask yourself the following questions when you’re researching ways to get financing:
- How much money will I need?
- How quickly do I need the money?
- What payments can I afford to make?
- What exactly will I use the funds for?
- How much risk is involved in the project I’m funding?
- Will I need short- or long-term financing?
- What will the interest rate be?
- What will the repayment terms look like?