Are you reluctant to take out a business loan? Take a look at these four great ways it can be good for your business.
Going into debt is a decision that requires careful consideration.
In a way, a loan can fix almost any problem a business might have. To understand how business loans work, it’s important to know that the process involves applying to a lender, undergoing an assessment of your business’s financial health, and agreeing to specific repayment terms. But that doesn’t mean every reason is a good reason to get one.
The truth is that growth is expensive. Small businesses, in particular, can have a hard time managing growth. Property expenses, marketing costs, and wages all pile up, leaving little for expansion. Relying on a bulging bank account is not a sound business strategy.
Business loans can help businesses capitalize on growth opportunities by providing the necessary funds to expand operations or pursue strategic initiatives. Businesses can borrow funds through various lending options, such as term loans or lines of credit, to support their needs.
If you’re having second thoughts about applying for a loan, this article may help. The application process for business loans typically involves submitting financial statements, business plans, and other documentation, followed by a review and approval from the lender. Below are four reasons why loan applications can make financial sense.
Exploring Your Business Loan Options
When it comes to business finance, one size definitely does not fit all. Business loans come in a variety of forms, each designed to meet different business needs and support your growth ambitions. Whether you’re looking to cover everyday expenses, consolidate existing debt, or refinance equipment purchases, understanding your options is key to making the most of your loan funds.
There are several types of business loans available, including unsecured loans and secured loans. Unsecured business loans are a popular choice for businesses that don’t want to provide collateral, offering fast access to funds with flexible repayment options. However, unsecured business loans may come with a higher interest rate due to the increased risk for lenders. On the other hand, secured loans require you to provide business assets or other collateral, which can often result in lower interest rates and a higher loan amount, as the loan amount is determined based on the value of the collateral and your risk profile. Secure business loans may also have different fee structures compared to unsecured loans, so businesses should be aware of potential charges during the application process, including any origination fees or other costs.
Interest rates and loan terms can vary widely between lenders and loan types, so it’s important to compare your options carefully. Some loans offer fixed rates, providing fixed repayments and predictable costs, while others may have variable interest rates that fluctuate over time. Fixed rates offer stability and predictability, making it easier to budget, though they may come with less flexibility and potential break costs. The right choice will depend on your cash flow, business goals, and how you plan to use the loan—whether it’s for managing everyday expenses, consolidating debt, or investing in new equipment to drive business growth.
Refinancing equipment purchases with a business loan can free up working capital and help you take advantage of better interest rates or more favourable repayment terms. Similarly, using a loan for debt consolidation can simplify your finances and potentially reduce your overall interest costs.
When considering repayment, there are various repayment options available, such as principal and interest or interest-only payments, which can be tailored to suit your business needs and cash flow.
Ultimately, the best business loan for you will align with your business needs, financial situation, and long-term plans. By exploring all your financing options and understanding the key considerations—like interest rates, loan terms, loan amount, fees, and repayment options—you’ll be better equipped to choose a loan that supports your business’s success and helps you manage cash flow effectively.
Understanding Business Loan Requirements
Before you apply for a business loan, it’s essential to understand what lenders are looking for and how you can position your business for success. Business loans can be a powerful tool for managing cash flow, covering everyday expenses, debt consolidation, or fueling business growth, but qualifying for the right loan starts with meeting specific lending criteria.
Lenders assess a range of factors when reviewing business loan applications. One of the most important is your business credit score, which reflects your company’s financial history and reliability. A strong business credit score can help you secure better interest rates and more favorable loan terms. Alongside your credit score, lenders will want to see a solid business plan that outlines your business goals, financial situation, and how you intend to use the loan funds for business purposes such as expanding operations, purchasing new equipment, or managing unexpected expenses.
There are several types of business loans to consider, including unsecured loans, secured loans, and business term loans. Unsecured business loans don’t require you to provide physical assets as collateral, but they may come with higher interest rates or require a personal guarantee. Secured loans, on the other hand, are backed by business assets, residential property, or other assets, which can help you access larger loan amounts and lower interest rates. Business term loans provide a lump sum with fixed repayment terms, making them ideal for specific projects like equipment purchases or refinancing.
Interest rates and repayment terms can vary widely depending on the lender, loan type, and your business’s financial health. It’s crucial to carefully review the loan agreement, paying close attention to the interest rate, repayment period, and any fees that may apply, such as origination fees or application fees. Understanding these details will help you manage cash flow and avoid surprises down the line.
To support your application, be prepared to provide financial statements, a comprehensive business plan, and details about your business assets and liabilities. Many lenders, including traditional banks and alternative financial institutions, offer a range of financing options with flexible repayment options and fast access to loan funds. Exploring different loan options—such as invoice finance, a line of credit, or business term loans—can help you find the right loan to meet your business needs and achieve your business goals.
Keep in mind that some lenders may require a personal guarantee, especially for unsecured loans. This means you could be personally responsible for repaying the loan if your business is unable to do so. If you want to avoid this, consider providing collateral to secure the loan.
By understanding the requirements for business loans and carefully evaluating your financing options, you can make informed decisions that support your business’s growth and long-term success. Always compare interest rates, repayment terms, and fees from many lenders, and don’t hesitate to seek advice from a financial expert to ensure you choose the best loan for your business needs.
Reason #1 – A Business Outgrows Its Location
Any successful business will eventually have to expand its original location. For instance, you might need more cubicles for workers or more tables to seat patrons. Expanding operations is a key reason many businesses seek a loan, as growth often requires additional space and resources. It’s a good marker of growth, but you might not have the capital to expand.
Frequently, this will mean looking for a sensible finance option. In this scenario, a business loan is a generally good idea.
Jim Martin found himself in just such a situation:
Like many great companies, Jim’s motorcycle repair shop started out in his garage. His lifelong
passion for motorcycles proved to be a great driver for growth.
The garage became cramped very quickly. All indications were that the business would continue to grow, so Jim took the plunge.
A $35,000 loan enabled him to lease a new space and expand his inventory. The borrowed funds provided a lump sum that covered both the leasing costs and the purchase of additional inventory, but also came with the obligation to repay the amount over time.
The right timing
and allowed him to realise his vision.
Adding space to an existing location or moving to another one is a big expense. Besides the obvious upfront cost, you should take into account the added overhead. It’s important to do a thorough cash flow analysis, including projected earnings. You should also ensure that the loan can be repaid within the specified period to avoid financial strain.
Reason #2 – Rising Equipment Costs
Every business relies on equipment in some way. And investing in equipment will directly impact performance.
Unless you get an unsecured loan, the equipment itself can act as collateral. Equipment finance is a specific type of business loan designed to help companies purchase new equipment or vehicles. In addition to equipment, physical assets such as property or vehicles, as well as other assets, can also be used as security for business loans. When setting up an equipment finance loan, an origination fee may be charged to cover the costs of establishing and managing the loan; this fee is typically only charged if you proceed with the loan. That isn’t to say all equipment costs deserve a loan. For small equipment expenses, a low-interest credit card is often a better choice.
If you take out a loan for equipment, be careful about the loan terms. A very long term loan isn’t always a good choice. Ideally, the loan term should not exceed the expected lifespan of the equipment. Otherwise, you could get stuck with loan repayment for something obsolete. Interest is usually paid periodically as part of the repayment process for equipment loans.
Also, make sure it’s required equipment. Getting a new truck for the company may seem like a no-brainer. But if it will only replace an older truck, it’s probably not a good idea. Only consider debt financing for equipment that fulfils business purposes. On the whole, this means things that will have a clear impact on cash flow.
Reason #3 – Boost Working Capital
Day-to-day expenses are not usually considered when people think about loans. But cash flow is often a big problem for new and small businesses.
Bank loans can be hard to negotiate for these business purposes. Banks are very careful about loans and a broad capital injection can be hard to justify. Often it’s easier to work with a financial institution that’s motivated to lend.
That was the lesson Andrew learned when he saw an opportunity to accelerate growth.
Limelight magazine is one of the leading art publications in New Zealand. At one point, market
growth started to exceed its capacity.
Andrew decided to expand the staff and enhance its production process. But the financial
support wasn’t there.
After applying for loans with several banks, he learned his credit history was a problem. Using a
business loan specialist, he was able to get the capital he needed.
A fixed rate short-term loan is best in this situation. The goal should be to use the loan to smooth out temporary setbacks. Things such as late customer payments and money owed on tax returns are examples of this. Businesses can also use invoice finance to quickly access cash tied up in outstanding invoices, which helps with paying suppliers, wages, or other expenses.
Alternatively, lines of credit could also serve this function well. A line of credit provides a lot of control over borrowing and can serve as a periodic capital injection.
Reason #4 – Setting Up A Future Loan
This may sound counter-intuitive. But sometimes, it’s a good idea to take out a small loan just to get better interest rates on a larger one.
Some businesses have a pretty good idea of what their needs will be in the future. Growth is easy to predict in some industries. Or a big contract or opportunity might come into effect at a certain date.
In those cases, a business knows with some confidence that an expansion will be in order. That expansion may require a sizeable loan. However, a poor credit history could have a significant impact on the terms of that loan. Maintaining a strong business credit score is crucial for securing favorable loan terms, as lenders use the business credit score to assess borrowing risk. A small loan could be a good way to improve credit scores and make sure the big loan is more favourable. When taking out a small loan, it’s important to make regular business loan repayments and understand the responsibilities involved, such as ensuring that guarantors are aware of their obligations if repayments are missed. Always pay on time to build a positive credit history and avoid any negative consequences that could affect future borrowing. Having a comprehensive business plan is also important when applying for larger loans, as it demonstrates the viability and financial health of the business.
You could justify an equipment loan, including the upgrade of old equipment.
An easy-to-repay small loan could prevent future problems. Even if there isn’t a reliable milestone coming up. Sooner or later, a good credit history will be a valuable asset.
Between a Loan and Lost Business, Choose the Loan
Now and then, business opportunities will come knocking. When they do, don’t let floundering cash flows be the reason you miss out on them.
Be smart about loans, but don’t be dismissive. Take the time to analyse the potential value of going into debt. If you can make more money by acting quickly, a loan is completely justified.
Don’t stay stuck in a garage, or working on outdated equipment. All these things hurt your bottom line much more than a loan would. Be smart and consider loans carefully.
We can help you find the loans that work for you. Head to our website to find out more about what we have to offer. You can conveniently apply online for business loans and get quick access to funds. If you’re ready to apply, use our online form to lodge your application in less than five minutes.
