Small business owners typically apply for loans from commercial lenders because they want more capital in order to have a more successful business.
A recent study shows that 29% of small businesses fail because they run out of capital. Apparently, there are many different types of lenders who approve commercial loans besides banking institutions such as private investors, credit unions and public funding. If the lender requires collateral, the small company can use their accounts receivable and even their inventory to secure the loan.
These loans can be very expensive for small businesses, especially if the loan originates from a less than a traditional lender. Fees and interest is generally included in all commercial loans. This is why a small business owner needs to thoroughly review the amount of money their business will be required to pay back, including interest, before they decide to accept the business loan.
With that said, the following are four reasons why applying for a loan may be worth it after all.
#1 To Purchase Equipment
Small businesses have two choices when they are ready to purchase equipment. They can either purchase the equipment or they can rent (lease) it. If they decide to get a commercial loan in order to purchase equipment, they will be able to use the purchase as a tax write off for up to $25,000.
This tax write-off will be for the first year, and it will depreciate as the equipment loses value over time. The small business owner can also choose to sell the equipment as salvage when it no longer works or is considered out of date.
It may be necessary for the business owner to complete a cost-benefit analysis in order to see if it is better for the business to purchase or lease the necessary equipment.
When a lender approves these types of business loans, they typically have repayment terms that do not last longer than 3 years, and the loans have monthly repayment plans. The amount to be repaid will be dependent on the projected economic life of the equipment that will be financed by the loan.
#2 To Acquire Real Estate For Operation Expansion
A bank is more willing to approve loans for existing small businesses that want to expand their business operations through property acquisition. Expansions are generally necessary if a business has a steadily increasing cash flow, is profitable, and it has a positive business forecast for the foreseeable future. These are all the factors that make it more probable that a bank will approve the small commercial loan.
These types of bank loans are usually approved as long-term mortgages, and the assets of the company will be used as collateral for the loan. In addition, the bank will require that business send them quarterly or monthly payments from either their cash flow or their profits.
The terms for these types of loans can range from 3 years up to 25 years, and the repayment also has interest rates that are associated with them.
#3 To Grow Daily Business Capital
Small business funding advisors at MaxFunding.com.au say, “also known as working capital, these types of business loans are used to provide financial stability for the company’s daily operations until the earnings and/or volume is stabilized.” They recommend, “if the company has a solid credit history and a viable business plan, a commercial loan can be used as a short-term financial solution so a business can grow and become profitable.”
Keep in mind that these types of loans generally have higher rates of interest than other types of commercial bank loans because lenders consider them high risk. For example, if the business never becomes profitable or is mismanaged in the startup phase, the company runs the risk of going bankrupt.
#4 To Get Or Increase Inventory
It is common for banks to approve short-term commercial loans to small businesses that have demonstrated a level of trustworthiness with the lender. Small business owners can do this by maintaining positive balances in all bank accounts.
There are some industries that are seasonal such as:
For example, if a retail business gets most of its sales between Thanksgiving and Christmas, the business can secure one of these loans to purchase the inventory they need ahead of time. These short-term commercial loans are repaid by the revenue generated during the busy season.