While the idea of a business loan may come along with the typical stigma of hard work, expensive, and time-consuming, there are times when business owners will need to take out a loan. Just because your business doesn’t have the necessary capital for a specific venture, it doesn’t mean that you shouldn’t consider taking out a loan to fund it.
Oregon has over 400,000 active businesses. According to the Secretary of State’s monthly publishing, there are around 5,000 new business applications submitted each month. These businesses need funding to start and funding to continue to be competitive in their respective industries.
Business loans are not something that you should shy away from. In fact, learning as much as you can about them will help you make a more informed and educated decision as a business owner.
Most Common Reasons For A Business Loan
Expanding Physical Location Or Moving
As your business continues to grow you may soon find you’re out of space. Whether your office is jam-packed with employees sharing offices or your restaurant consistently keeps losing customers due to long wait times, expansion is something you should consider.
The choice to expand on your current location or move to a different one will require up-front costs. If you lack the capital to make your expansion or move possible, a term business loan can be the answer.
To Build A Good Credit History For Future Funding
As many new business owners come to find out, it can be difficult to receive funding for large-sized loans without an established history of good credit for the business. It can be a great decision to take out a short-term business loan for a small amount to help build a good credit history.
On-time payments are key to making this work. Don’t consider taking out a loan you know that you can’t repay. Only employ this credit building tactic if you can comfortably cover the repayment of the loan.
To Purchase New Equipment
As your business grows so does the need for new equipment. It’s very common for firms who need funding for updated IT equipment, machinery, or other tools to take out a term business loan to finance the equipment. Getting a loan for equipment is typically easier than other business loans because the equipment itself is used as collateral.
To Cover Inventory Costs
Business owners know that inventory is one of their biggest expenses. It’s important to keep up with the demands of your industry market. When you need to purchase large amounts of inventory that you plan on selling later you need capital to cover it. If you don’t have enough capital on hand, applying for a short-term loan can help absorb your inventory expense while you wait for payment from accounts receivables.
What Types Of Business Loans Are There?
Small Business Administration Loans (SBAs)
These loans typically offer lower interest rates and allow for a higher approval rate than traditional business loans. These are offered at the request of the Government to help small businesses continue to grow and function in the economy. These loans are financed through locally approved SBA lending institutions.
The Government agrees to back a percentage of the loan, typically around 90% or more. What this means is, if the borrower defaults on the loan, the Government will pay back the lending institution for the amount they guaranteed the loan for. This greatly reduces the lending institution’s risk when it comes to loaning the money to a borrower. Most business owners who were unable to get approved for a traditional business loan have great success with SBAs.
Term Business Loan
This is also considered a standard or traditional business loan. This is where a business owner gets funding from a local bank or lending institution for their business needs. The bank will consider the business’s credit history and the owner’s credit history when making a decision on whether or not to approve an application.
Typically these loans are put into two different categories. These are short-term and long-term. Short-term is typically any loan with a term up to 7 years. Anything over 7 years is considered a long-term loan. Most banks will require the business owner to put up collateral to receive the loan. These loans are highly dependent on a good business credit history and a good business owner credit rating. Some new businesses may have difficulty receiving this type of loan without a significantly high down payment or lots of collateral.
Many Oregon businesses have large seasonal expenses. Farmers fill a large portion of these businesses. A business line of credit gives a business owner a set amount of money that is readily available whenever they need some extra cash. The business owner can withdraw any amount up to the maximum set by their bank. The business only pays interest on the amount they withdrawal.
Business loans are essential for many businesses to keep innovating and expanding. Don’t let the concept of them dissuade you from taking action on new ventures that you feel can make your business great. The simple action of taking the time to understand the different sources of funding available to your business and understanding how they work will allow you to make a great decision for the future of your business.