BAJAN SUN MAGAZINE
NOV 2014
5 Reasons To Take Out A Business Loan:
S
mall businesses, in order to keep their services alive,
from time to time must have an injection of funding.
This usually arises in the form of a loan from commercial
banks, credit unions or other quasi-financial institutions.
Some lenders require security for the loans and hence the
use of accounts receivable or inventory as collateral is an
option. Borrowing money is expensive for a company and
raises its risk. Regardless, debt is one of the forms of
financing open to small business operations. Here are four
reasons that companies often use debt financing.
1. To Purchase Real Estate and Expand Operations
Lending agencies are likely to loan money to businesses
that wish to purchase real estate to facilitate expansion of
their operations. This desire to expand gives the bank
confidence in the success of the company to date.
Expansion generally only happens if the firm is turning a
profit and a positive cash flow and has positive
forecasting numbers for the future. That is a scenario that
makes a financial institution likely to approve a loan.
Loans for real estate are usually in the form of a
mortgage; a long term loan lasting 15 – 30 years.
2. To Purchase Equipment
Businesses have a couple of choices with regard to the
acquisition of equipment. They can buy it or they can
lease it. There are good reasons to take out a loan to buy
your equipment. You can take a tax write-off of $25,000
the first year you earn the equipment and depreciate the
rest of the equipment over its economic life. You can also
use the equipment for its life and sell it for a salvage
value. In order to know whether it is best to buy or lease a
cost-benefit analysis should be conducted before you
make the decision. When a lending institution provides a
loan for equipment, it is usually an intermediate term
loan. Intermediate term loans are generally for 10-15
years.
3. To Purchase Inventory
Lending institutions sometimes make loans to small
businesses to purchase inventory as some businesses are
seasonal in nature, particularly those based in retail. If a
business makes most of its sales during the holiday
season, they may want to purchase most of their inventory
prior to that time in readiness for that busy period. Loans
to purchase inventory are generally short-term in nature
and companies usually pay them off after the season is
over with the proceeds of the sales.
4. To Increase Working Capital
Working capital is the money you use to manage your day
-to-day operations. Small businesses sometimes need
loans to meet their daily operational requirements until
their earning assets are sufficient to cover their working
capital costs. Financial institutions sometimes loan shortterm monies to small businesses to enable them to get off
the ground and grow. In time, the company’s assets
should enable them to earn money and thus make
repayment quicker.
Speedy settlement of debt can be beneficial to the small
business as it may incur less interest dependent on the
loan category. Working capital loans may have higher
interest rates than, for example, real estate loans, since
banks consider them riskier.
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