By Kate Manning
It doesnít take a finance degree to know that the current economy is tough. Unemployment rates are still at an all-time high, and many companies have gone bankrupt, while others are barely hanging on by a thread. In fact, in today’s ever-changing and fluxing economic climate, business loans are about the only option small business owners have for obtaining cash to further their companies. With an efficient business loan, almost any enterprise can see immediate growth as long as they use the additional capital wisely.
Reasons for a Business Loan
Business loans are taken out for several reasons. A company may want to secure financing to maintain business operations, invest in equipment, start a new branch, or any number of other motivations. Not only are these loans beneficial for burgeoning businesses, but they are normally easy to obtain as there are a multitude of lenders who willing to partner with business owners with a credit score of 720 or higher, a stable income, and a decent business plan. However the biggest advantage of taking out a business loan during tough economic times is that companies can use it to increase their working capital. While companies that are looking to expand often already have enough money to become larger, taking out a loan allows them to maintain their operating cash flow, making it easier for them to cover any unexpected expenses. Thus, they are able to make payments on their loan by using the new income gained from expanding their business.
Another benefit of getting a business loan is that, if the loan is lent to a corporate entity, the loan will not usually have to be repaid by the business owner if the company fails. In the event of failure, the business is liquidated, which helps pay back part (sometimes all) of the funds borrowed. Many business owners keep this advantageous aspect in mind when borrowing money because it is only the corporation that will go bankrupt in the event of loan default, not the owner personally.
What is particularly advantageous about seeking a business lone in the current climate is that interest rates are unbelievably low right now. As the liquidity of banks increases in the wake of the recession’s brunt, banks are increasing the rate at which they lend and interest rates will soon rise to compensate. A large loan taken out now or in the near future will have much lower overhead than will one taken out in two year’s time, making this the opportune time to plan expansion.
Ultimately, all business owners should evaluate their wants and needs before contacting a lender. This allows the business owner to see which type of lender is the best fit for their company. Similarly, it is crucial that business owners take the time to read the all of the terms and conditions accompanying any business loan they are considering. There are often early repayment penalties associated with a loan and it is important to obtain a business loan that does not incorporate these penalties, as prepaying a loan in full can save a business a large amount of money in interest.
What to Watch Out For
There are a number of things to watch out for when you decide to take out a business loan. When your liaison at the bank presents you with your options, make sure that you understand the terms. If you don’t, ask them to explain them again until you do understand. Under no circumstances should you enter any agreement until you know it through-and-through: the frequency and flexibility of payment deadlines, how interest will be calculated (and how often), any penalties associated with missing a deadline, what kinds of customer service you can expect, and whether or not you can renegotiate the terms in the future are all key points to grasp. Remember also that your current bank is not the only one willing to lend. Examine other lenders’ ability to offer you a loan to your specifications before making up your mind. With a little caution and patience, you can avoid most unforseen, negative consequences that might otherwise arise.
Is a Loan Right for you?
Despite the drawbacks, business owners should keep in mind the many advantages a loan can present. Expanding a business in the current economic climate could mean achieving far greater success once we bounce back from the recession, and the sudden, increased liquidity can help a business suffering under sudden expenses pull through until it can stand on its own feet again. The main thing to remember when obtaining a business loan is to shop around for the best loan rates and always partnering with a lender who is trustworthy. If you can secure a reasonable interest rate, payments, and the ability to repay the full amount at once, getting a loan just might take your business to the next level.
Kate Manning is a business major who has worked under others and as a self-employed entrepreneur. She currently owns and manages her own business in Washington State, and works as a content creator for Online Finance Degree