The purpose of loans in business
If you want to start or grow your business, you have to devote money for buying equipment, real estate, and inventory and for meeting working capital expenses. The difficulty for a business is that managing all these expenses besides the regular expense of operating your business can be tricky, and paying upfront for your needs of business is often not practical till your business perceives more growth. It’s a circular dilemma. You cannot grow if you do not invest, except how can you invest in your business whilst keeping funds in your business for costs of operations? Therefore we take loans for meeting the day-day expenses of business and for expansion purpose.
A loan is taken when you obtain money from a financial institutions or banks in exchange for principal repayment in future, in addition to interest. The principal is the sum you borrowed, and the interest is the charged amount for obtaining the loan. As lenders are taking a risk that you could not pay off the loan, they have to counterbalance that risk by charging a fee – identified as interest.
Following are the purpose of loans in business which help them to operate and expand successfully:-.
1. Buying Real Estate and Expand Operations
Banks are expected to loan money to subsisting firms that want to buy real estate to expand their operations. If a business is expanding, then the bank are familiar that the firm is successful and it wants the firm to carry out its operations. Expansion usually only happens if the firm is making profit and a have positive cash flow and has optimistic forecasting future numbers. Those are the circumstances that make a bank expected to grant a loan.
2. For purchasing Equipment
Businesses have two options while making an acquisition of equipment. They can lease it or they can buy it outright. There are good quality reasons to take loan for buying your equipment. You can make a tax write-off on the sum invested for buying the equipment, the first year you buy the equipment and can depreciate the equipment for respite of its economic life. When a bank gives a loan for equipment, it is typically an intermediate term loan which is generally 10-15 year term loans.
3. For purchasing Inventory
Sometimes banks give loans to businesses to acquire inventory. Some businesses are cyclic in nature, predominantly retail businesses. If most of the business sales are made in the course of the holiday season, they desire to acquire the majority of their inventory preceding to the holiday season. They can need a bank loan previous to the holiday season to buy a large amount of inventory to get ready for that time. Bank loans to acquire inventory are usually short-range in nature and companies typically pay them off after the season is ended with the sales proceeds from their seasonal sales.
4. For increasing Working Capital
Working capital are the funds you use to direct your daily operations of business. Sometimes businesses need ACH Loans to meet up their every day operations needs till their earning assets are adequate to cover up their needs of working capital. Sometimes banks give short-term money to small businesses to allow them to get off the ground and develop. As the business develops and their own assets allow them to make money, they can pay back the working capital loan to the bank. These loans might have higher rates of interest such as, real estate loans, as banks consider them riskier.