With the goal of increasing their profitability, small businesses may take out commercial bank loans. Small businesses may be able to use inventories or receivables as collateral for loans.
Borrowing money can be very expensive depending on where it originated. There are also fees and interest that come with almost every loan. Before accepting a loan, financing optionsshould be able to calculate the total interest they will have to pay over the life of the loan.
Here are four reasons why a business loan is worth taking on.
To Buy Real Estate and Expand Your Business
Existing firms looking to buy real estate for expansion will likely be offered money by banks. Expansion generally happens if a firm is turning a profit, has a rising cash flow, and has positive forecasting numbers for the future. This scenario is what makes it more likely that a bank will approve a small-business loan. A mortgage is the most common form of bank loan for real estate. Bank loans for long-term will be secured by company assets and require quarterly or monthly payments of profits or cash flow. The repayment of the loan will be subject to an interest rate and can last from 3-25 year.
To Buy Equipment
There are two financing options for businesses when it comes to purchasing equipment. They can either lease or buy it. A business owner can depreciate equipment over its life span if they borrow money. If the equipment is no longer in use or outdated, it can be sold at salvage value. To determine whether it is better to lease or buy equipment for a company, a cost-benefit analysis must be done. A bank will usually lend equipment to a company for a short term. The loan is typically repaid monthly and lasts less than three years. The equipment's useful life will usually be the determinant of when the repayment is due.