The Top Situations in Which Financing Offers a Catalyst to Success
Proper and timely funding is essential for any business to succeed. But access to capital is also one of the most common challenges businesses of all stripes encounter. From the early stages to growth and expansion, if a company lacks the necessary funds to execute on its strategies, it is destined to fail.
For these reasons and more, many companies take out a business loan to fund their endeavors. While business loans don’t provide a “one-size-fits-all” solution, they can offer a valuable tool at critical junctures and key milestones for many businesses.
In this post, we’ll examine some key scenarios for business owners in which a business loan can offer an effective funding mechanism and provide companies at various stages with a much-needed boost.
Early Stage Revenue Phase
Naturally, one of the most common situations in which businesses elect to apply for business funding is when the company is in the early stages of their operations. Fledgling companies often lack access to sufficient working capital and require funding to get off the ground and cover expenses.
While early stage business loan products exist, it is important to note that the requirements vary. For example, some lenders may require you to be in business 6 months to a year, provide proof of consistent revenue, while others will lend to brand-new businesses with no established business credit history however would be based on personal credit. That personal credit minimum score could be as low as 500 but on average 600 or better to get reasonable terms.
For an SBA loan you would need to be in business 2 years or as a pre-revenue startup you could qualify for one of the SBA loan products that will again be determined based largely upon personal credit, personal tax returns and business plan. Some options would also require collateral in order to qualify. We are mostly discussing unsecured loans.
While equipment needs and types vary widely between business types and models, the fact remains that practically every company requires some sort of equipment in order to effectively deliver goods and services. From early stages to growth and expansion, equipment expenses can be significant and sometimes a cost that is difficult to incur.
When purchasing equipment, companies may opt for a small business equipment loan in order to access the funds necessary to maintain operations. Business equipment financing typically needs little paperwork, which is an added benefit for going this route.
There are ways to lease equipment as well so make sure to as the lender or business loan broker you have contact with.
Bringing new talent on board
Any proven leader can attest to the fact that success in business and high-quality talent are intrinsically linked. Whether you’re making widgets or websites, people are essential and finding, training and fairly compensating them can be costly.
Businesses at any stage often choose to take out a loan in order to hire new talent because it will help alleviate some of the burden on cash flow. Other companies make the decision in order to keep pace with growth or adequately staff an expansion or new location. Regardless of the reason, it is important to carefully weigh the risk versus reward. If a new hire is a move that is likely to pay off by adding efficiency or improving the bottom line, then a loan may be worth the cost of capital.
Expanding or opening a new location
The need to expand is a situation all too familiar to many businesses. Relocating to a larger space or expanding an existing footprint can help provide more elbow room and space for growth, but without the funds to make the project happen, it’s easy to feel stuck.
Business loans can provide critical funding to help your business realize its potential. Specifically, term loans are often well-suited for expansions and the associated up-front costs and overhead. But as previously mentioned, it is important to carefully evaluate the return on investment of expanding your business. For example, do you project that expansion will provide enough added revenue to cover your loan, while still allowing your company to remain profitable? Be sure to ask these key questions.
Inventory is a key component of a healthy business that sells products and it is not uncommon for companies to finance the purchase of inventory. The decision to take out a business loan to purchase inventory may be especially wise during periods of high demand or busy seasons. For instance, a short-term business loan can offer access to the working capital that allows your business to purchase enough inventory to meet demand when sales are ahead of expectations. With the profits from a high-volume sales period, you can quickly repay the loan.
While credit may not be a factor for well-established companies evaluating financing for growth or expansion, small businesses and startups often lack a credit history and pursue business loans as a means of building credit. By establishing credit, younger companies are better positioned for future loans and ventures. If you chose to use your personal credit for financing then you will be guaranteeing the loans personally. Nothing wrong with this as long as you pay back the loan on time.
The bottom line
Just as no two companies are exactly the same, financing needs can vary widely. But if your company falls into one the categories outlined above and working capital is preventing your business from reaching its full potential, a business loan may offer an effective tool for overcoming financial obstacles. There are several loan options and often difficult to pick which one and where to go for accessing it. If you need assistance in choosing the best route to go or whom to apply with, please contact us.