When starting and operating a small business, the chances are that you will need to get financing through a business loan. Over the business’s life, you may need multiple business loans as it is common to require funding for startup costs or expansion.
At some point in your life, you must have encountered this famous accounting equation, “Assets = Liabilities + Owners Equity.” Liabilities consist of short- and long-term payable options, also called business loans.
Business credit is a catalyst in giving the business a well-needed push, especially in its initial stages when things are below the break-even point. Owner equity alone is not enough to cover all financing requirements.
Hence, loans are the backup option when owners’ equity cannot fulfill commercial needs. Before obtaining a loan, you have to determine if you need one and if you qualify. Here are five reasons you may need a business loan and why the loan could be denied.
Starting the Business
The dawn of the 21st Century has ignited the passion for entrepreneurship in the hearts of millennials, thus giving rise to several young business minds. As a result, millions of startup companies are in every corner of the globe. Business loans are the first option for these young entrepreneurs to execute their unique ideas without worrying about the sources of finances.
Growth and Expansion
Long-term investments are the key to sustainability working in this dynamic environment. Management cannot spend big in one go, so they look for long-term business loans for future investments. Obtaining a loan for growth and expansion is common and generally easier to get than a startup loan because the business is established.
Acquiring Supplies and Equipment
Spending the cash in hand is too risky to purchase the inventory or equipment, keeping in mind the fixed expenses of the business. A company that is highly sensitive to seasonal fluctuations cannot precisely predict future inventory requirements; hence, they run out of inventory most of the time. Short-term loans always save their day by maintaining the balance.
Keep the Business Going
Well, expenses are the most heartless creature in the Corporate World! No matter how rapidly your sales are going down, expenses will remain fixed. For many reasons, reporting lower or no profit is reasonable for running a business. This phase is temporary, and business loans keep things from crashing.
Retaining Top Talent
In expansion, extra money is already tied up in different projects. New projects can only be successful if you have top talent on board. You cannot reap the fruit in the early stages. To remain competitive in the market, Management must approach different institutes for credit purposes to pay off their key employees’ salaries.
Reasons a Business Loan is Denied
Businesses can become essential for some people to launch their startups or to expand an existing company. Business loans help secure inventory, rent functional space, purchase equipment, hire employees, and cover other tremendous expenses. But small business owners face difficulties due to seven reasons:
- Poor credit history
- Lack of a solid business plan
- Limited cash flow
- Disorganization
- Too many loan applications
- Failure to shop around
- Failure to seek expert advice
Conclusion
Business loans and Owner’s equity are the two engines that generate the necessary power to uplift the organization. When owner equity fails to deliver the energy needed for the system, business loans back it up with long-term and short-term credit options; on the contrary, excessive loans can be disastrous for the organization. A compelling study needs to be carried out to measure the payback ability of the firm to avoid any significant blow. Only then can management decide whether it’s worth taking the risk.
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