No owner ever likes to be under debt, for it always increases the already impending risk the company is facing. Yet, there come a number of occasions when small businesses have to borrow money to run smoothly. Loans may be of many types: commercial bank loans, estate loans, loans from credit unions, loans against a collateral, etc. The market is full of many who can guide you which loan suits best to your business category. You can consult someone like hard money lender san diego or some other reputed firm to guide you in this regard. There may be a number of reasons behind using debt financing, but the following four are the most crucial ones.
To increase the working capital
Working capital is the amount with which you manage your daily expenses. Sometimes, small businesses are unable to meet their running expenses because of insufficient sales in the starting phase. They have to take loan from some hard money lender until their earning assets get strong enough to support them. Commercial banks do offer short-term loans to small businesses to help them out of the crisis. The interest rate for such loans is usually higher than real estate loans because banks consider them much riskier. But, small businesses do take such loans and retire them as soon as they get in position to repay.
To purchase the occasional inventory
There do come such occasions in the daily life when the sales may reach their maximum to meet the demand. Small businesses are often unable to fulfill the need of the hour because they lack in high stock. In order to avail themselves of the opportunity, they must have sufficient inventory before the sales season, say holiday season. Here, they need a bank loan to buy a large amount of inventory to gear up for that time. Banks do offer short-term seasonal loans at higher interest rates. Small companies take loans, purchase the required inventory, sell and earn profit and repay them after the season is over.
To purchase equipment
Small businesses may buy their own equipment or get them on lease. They should decide either of these by making a careful cost-benefit analysis. They may need an intermediate term loan, generally 10—15 year term loan, from some bank to buy their own equipment. These loans are sanctioned on normal interest rates which are easily affordable. Small companies may use the equipment for its life and sell it for a salvage value.
To purchase real estate and expand operations
When a small business is making consistent progress, it is likely to buy some real estate and expand its operations. Banks like this scenario as it verifies that the business is turning profit with a positive cash flow. It can easily and smoothly retire loans taken from a bank. Such flourishing small companies need to take loans in the form of mortgage or long-term bank loans usually for 25—30 years. They get such loans by using the real estate as collateral. They get the loan, purchase some real estate, expand their operations, earn handsome profits and pay the loan back. You also need an exit strategy to cash out on your real estate.
Hence, small businesses or companies have to take loans to flourish themselves and survive in the market.