A good loan may be a lifesaver, helping your business get out of a tight spot and back on its feet. But even if your company is running smoothly and successfully, there are typically some good reasons to take out a loan.
From keeping up with seasonal payroll increases to getting money to grow your business, there are generally a lot of good reasons to get financing, even for companies who are in good financial shape.
Here are five ways that successful businesses may benefit from a loan:
1. To help with making large purchases
Sometimes your business will need to make a significant purchase, like expensive manufacturing equipment. Big purchases like these typically take a chunk out of your cash flow and can make keeping up on operating expenses a tight squeeze. Using a loan to pay for large once-in-a-while purchases may help keep them from taking a big bite out of your capital or interrupting your flow of operation by spreading the cost throughout a series of payments that are a lot easier to manage.
Preventing large purchases from becoming a financial burden will help negate the cost of interest in the long term, especially as you put new equipment or vehicles to work.
2. To keep up on seasonal cash flow
Many companies gain the bulk of their income during a few months of the year. Seasonal businesses like these have to spread out the revenue brought in during their busy season to maintain their operation through slower months. If your company has slow periods, a loan may help you keep up on operating expenses. You may also use your extra capital to stock up on inventory and prepare a strong marketing campaign so that you are able to make the most of the busy season when it arrives.
Line of credit (LOC) products (from trusted bank partners) typically give you access to a specific amount of funds, allowing you to withdraw funds as needed over a period of time. You decide when and how to use your funds and your interest-only monthly payments are based on the amount you actually use. This may be a great fit for seasonal businesses needing to ramp up for their busy season every year or needing to stretch funds during their slower months.
3. To provide a financial safety net
Most small businesses manage a tight budget, which makes them more susceptible to unforeseen circumstances throwing their cash flow out of balance. A large unexpected expense, or a slow business period, may quickly impact your company and make it hard to get back on your feet.
In order to avoid unpleasant surprises, it’s generally a good idea for businesses to have six to twelve months worth of cash in the bank in case of emergencies. You may use traditional loans or lines of credit to help pay for everyday expenses like payroll and bills, and in order to make sure your business has enough capital to keep its financial safety net in place. Or you may consider using this financing option as your backup plan until you are able to save your emergency fund.
4. To build or establish credit
A good credit score doesn’t just help you qualify for loans. Companies outside of traditional lenders and credit card providers will sometimes use your credit as a factor when deciding whether or not to enter into a partnership with you.
When your company is running well, it may be a good idea to take out a loan you don’t otherwise need for the purpose of building up your credit score. Paying back a loan in full, and making every payment on time, will improve your credit score. You may consider it an investment or even part of the financial safety net mentioned above. With a better credit score, you’ll typically be able to choose from a wider variety of loans with lower interest rates if you ever need them in the future.
5. To expand operations
If your company is successful enough that there’s no obvious reason to take out a loan, that may mean it’s time to expand. Loans may help cover the costs of extending inventory and opening or moving to a new location so you can focus on what’s most important: your business.
Expanding is a big endeavor, and you need to be focused on that goal to make sure it’s successful. If you’re expanding your business, you’ll most likely need new personnel, more office space, and possibly more equipment or inventory. You may use the capital from your loan to bring on new hires and invest in your company’s success by making sure your employees are well trained, have a positive environment to work in, and have all the resources they need to help build your business.
How to pick the right loan
Every business is unique and has different needs. There are a lot of loan providers and types of financing solutions out there, so it pays to do your research. Whatever your reasons for getting a loan, you should look at the math before you commit. Consider repayment terms, interest rates, and fees associated with loan origination.
It’s important to make sure the financing partnership you’re entering into is going to be in your company’s best interests. Small Business Loans (SBA loans) are a popular option for companies who are at least somewhat established (2+ years in business) and successful. They typically have the best loan rates with the longest repayment terms available to small businesses. SBA loans of $30,000 - $500,000 may be used for working capital and debt refinancing.
SmartBiz® is a great option for anyone interested in an SBA loan with our dedicated team, streamlined application and commitment to making the process quick, easy, and painless. You may start preparing to get an SBA loan right now by going through our SBA loan checklist. Or see if you pre-qualify in just five minutes, with no impact on your credit score.*
