Reasons to take out a business loan
The most common - and generally the easiest - reason to get a business loan is for expanding your business, either by opening new locations, entering new territories, or otherwise increasing the scope of your current operations. Lenders see that your business is succeeding and are willing to loan you money to do "more of the same."
While expansion is probably the most common reason for applying for a business loan, here are a few other ways companies use the extra financing:
- improve facilities and conduct renovations
- invest in major equipment
- boost working capital
- build up inventory
Often, even businesses that have enough capital for an expansion or equipment investment opt for a loan instead. This leaves them with the operating cash to cover unexpected expenses, while the new income generated by the purchase or expansion covers the cost of the loan.
Unfortunately, the time when you need money the most is when it's hardest to get a loan: during the startup phase. You simply won't get a new business loan by walking into a bank with an idea and enthusiasm - and the same goes for buying an existing business. You need to demonstrate an understanding of the industry, business acumen, and commitment.
Surprisingly, lenders are routinely approached by would-be business owners who have little or no specific knowledge about the industry they want to enter. Don't make this mistake. Instead, prepare an in-depth analysis of your market, projected expenses and income, and other details. Show them you're committed by doing the research before you ask for a loan.
It helps if you and your management team have experience in the industry, especially ownership experience. Prior success running other types of businesses can help, too, but the more relevant your experience, the better.
Many lenders will also expect to see that you've made a personal financial commitment to the business, and they'll ask how much of your own money you're investing. You won't necessarily have to put up your house as collateral - but some lenders may require it.