Taking out a business loan does mean taking on debt, however. So it’s important to understand how much you’ll pay in interest and fees to determine your potential return on investment. There are several reasons why you might want to take out a business loan. Banks are likely to view real estate loan applications more favorably when the business is turning a profit, has a rising cash flow, and has positive forecasting numbers for the future. Bank loans for real estate are usually in the form of a mortgage. Long-term bank loans will use company assets as collateral and will require monthly or quarterly payments from profits or cash flow. The loan term can run anywhere from three to 25 years and will have an interest rate associated with its repayment. If your business relies on specialized equipment, small business loans can help you replace it if it becomes outdated or purchase critical pieces of equipment you might be lacking. The IRS allows you to deduct the cost of equipment as a Section 179 expense. The Section 179 deduction limit is $1 million, with a phase-out limit of $2.5 million. Equipment you buy for the business can be sold for salvage value when it’s outdated or no longer functional. A cost-benefit analysis is necessary to determine whether it’s better to buy or lease equipment for a given company. In that case, you might explore your options for taking out short-term loans. These are loans that are generally repaid in less than one year. To get approved for a short-term loan with your current bank, you may need to have a good banking relationship. Making payments on time and holding a positive balance in a checking or savings account are both ways to build trust with a bank. Keep in mind that bank loans to purchase inventory are typically designed to be short-term in nature. So you’ll want to formulate a strategy for repaying them quickly, which may include using proceeds from seasonal revenues. Working capital loans generally have a higher interest rate than real estate loans because banks consider them riskier; if the business is mismanaged at a crucial time during its infancy, or if the earning assets of the business never generate a profit, the company will face bankruptcy. For this type of financial need, a shorter-term loan might be more appropriate. If you’re hiring seasonal employees, for example, you could get a loan with a six-month term, then use the proceeds from seasonal sales to pay them off. You could also use a small business loan to create incentives to help retain your staff. For example, you might borrow money to fund a company retreat that’s focused on improving training and facilitating communication, while also giving your employees a chance to relax. The payoff comes when those employees return to work energized, motivated, and committed to sticking with you for the long-term.
