There are two main funding options available for businesses: take out a business loan or bring in investors. Both options have their pros and cons; however, the majority of business owners tend to prefer business loans because it allows them to maintain full control of the direction of their business and keep flexible terms.
If you’ve decided a business loan is the right choice for your business, the next step is to determine the loan type that you need. Here are four loans your small business might need over time.
Borrowing for Equipment
All businesses need equipment to operate. Whether it’s a wrecking ball to level an old building, a coffee maker to serve up some hot Joe or a couple of computers – businesses need equipment. But high-cost items can make it challenging for many small businesses due to the up-front costs needed before you've ever turned a profit. Many businesses seek to circumvent this up-front cost by purchasing used or low-quality equipment, which can cause significant long term issues. Equipment loans can be quite lucrative to the success of your business if they enable you to purchase the right products up front.
Equipment loans can also be utilized by existing and successful companies looking to ramp up production to meet an increasing demand. In order to accomplish this, a business must look towards either updating outdated equipment or simply adding additional assets to an already functioning production line.
For these reasons, financing usually makes the most sense if the equipment depreciates or loses its value slowly, over 5 years or more. But think through it carefully - if you’re looking at a brand new computer that may be obsolete in a year or two, it might be worth considering a tax advantaged lease instead.
Helping Your Business Expand
Financial growth and internal business expansion go hand in hand. The big question facing any business is how to grow in a way that is both manageable and cost effective.
With more products and more customers comes increased demand on your staff, space and resources. It’s a good problem to have, but not if you lack the capital to expand. An expansion loan is a good solution if you’re looking to hire an extra worker, add an additional delivery route or expand your hours.
Filling in the Gaps
If you manage product and have to turn over inventory, having cash on hand is a must. Being able to stock your shelves and offer products is vital to your profitability and reputation. Many businesses experience seasonal shifts in sales volume and cash flow, which often bring in large volumes of capital and customers, but also require more inventory than what’s typically kept on hand during the rest of the year.
To avoid running out of inventory during peak season, inventory loans allow businesses to attain the supplies they need to keep up with fluctuating periods of demand in their industry. Inventory loans can help a business take advantage of busy seasons so they can survive through the slow seasons. Most inventory loans are short term, between 6 and 18 months, and are designed with the seasonal business owner in mind.
General Purpose Loan
Having working capital and general purpose funds on hand to cover day to day operating expenses is critical, especially because working capital is often used as a financial metric to determine the financial health of your business.
A working capital loan may be a smart choice if your business is healthy but revenues tend to lag expenses, such as when your clients or partners pay you net 30 or in arrears. You may find yourself at times short on capital to pay employees or purchase products. Access to working capital is crucial for all businesses to meet their continued operational needs, whether they utilize a business loan or not. Unexpected events do arise, and these events can create a financial burden and dilute the value of your working capital, requiring months of recovery time. This “all-purpose” loan fits most businesses, no matter your stage of development. Instead of defining a specific capital, a working capital loan is intended to be versatile and nonspecific.