A small business has different reasons for seeking a business loan. It’s not always immediately obvious to the casual observer either. A company director might make a case to invest in a pet project they’ve been nurturing for years to reach a point where it makes commercial sense and convince the board to invest in their project. Taking on debt is a risk, so shrewd minds must examine whether it makes financial sense to do so, i.e. the gain is likely to outweigh both the additional risk and the financing costs too.
Here are four reasons that a company may choose to apply for a small business loan.
1. Purchase an Office or Warehouse Facility
It’s not always possible to find a well-placed warehouse or office that’s available for lease on preferential terms. Sometimes the right property to allow the company to expand is only being offered for sale at the present time.
A decision might be made to partly fund the purchase using one of more small business loans from a site like Lending Club. The total loan value isn’t likely to cover the majority of the purchase price, however, retained earnings in the business may cover the rest.
Owning a property that you conduct business from is better for companies that wish to heavily customize the premises beyond what a leaseholder is permitted to do. It’s also possible to complete the purchase and then offer a lease for part of the building space that’s not needed.
2. Grow Inventory to Meet Demand
As a growing business, keeping up with the inventory requirements is hard to do. It becomes necessary to allocate more working capital to purchase inventory for subsequent sale, yet if the earnings are low, there are not necessarily enough spare funds to do so.
Taking out small loans for business expansion is very normal. Often, it’s necessary to grow using debt to bankroll the growth rather than halt its progress by being too thrifty.
3. Equipment Acquisition
Purchasing plant and machinery is very costly early on. Depending on the business that you’re operating in, some machinery can be as much as six- or even seven-figures. Obtaining small business loans to finance the cost of important equipment is required either when starting up, expanding, or it becomes unavoidable but to replace aging machinery as it keeps breaking down.
4. Dry Powder
Dry powder is a term that means having cash set aside for business opportunities as they arise. The idea is to have a substantial amount of cash available to jump on any bargains or great opportunities.
Rather than needing to arrange new financing when an opportunity presents itself, which delays being able to make an offer, the idea is to borrow earlier to have the funds ready. This approach is suitable for businesses that see occasions when leaping in is very profitable but only works when being nimble and quick to act.
Astute companies carefully consider what amount they need to borrow and what their ideal repayment period is for any loan before going ahead. This ensures they only take on debt that the business can handle.