There are many reasons why a company may need a business loan, whether it is needed on a long-term basis or just to cover a temporary shortfall.
All forms of loans cost money and should be considered carefully before applying, as there are various types of commercial finance options that may suit your requirements better than others.
Reasons for a business loan
Most companies require equipment to be able to operate, while all of this machinery will need to be maintained and replaced periodically. You can either buy or lease equipment, with there being benefits in both cases.
If you lease equipment, you will be able to upgrade whenever you need to, although you will pay each month and never own the object. However, if you take out a loan to buy the equipment, you will be able to take advantage of tax relief and claim for any depreciation of the item. Consult a professional before making your decision to ensure that you maximise the benefits available.
You may want to expand the company operations, which may include relocation to larger premises or improving the existing building. A business loan may be used to achieve this and could be repaid over a longer period, perhaps 20 to 25 years. If you can prove that you will be more likely to have a positive cash flow and be making a substantial profit after the modifications, it is probable that you will be approved for a loan of this type.
A short-term loan may be required to purchase stock, especially if you have seasonal demand. You may need to buy more products in the lead up to your firm’s busiest time, preparing for the higher demand for goods.
However, if you experience difficulties in cash flow and working capital, you may also want to consider a short-term business loan. Just be aware that banks may charge a higher rate of interest on this type of lending.
Why a business loan may not be right for your company
Although company loans are a possible solution in many scenarios, they also have disadvantages to be aware of. If you outsource accountancy efforts, your advisor will be able to help you decide whether a business loan is the best option for you. The cost of a short-term loan may be an additional concern for you, especially if you need the capital to help with cash flow problems.
If you are considering a business loan and would like some impartial advice, please give us a call today.