The Top 3 Reasons Companies Apply for a Business Loan
What are the top 3 reasons for applying for financing?
In 2016, the Federal Reserve Bank surveyed 10,303 companies. The report found that 45 percent of those companies applied for financing.
The top reasons for applying for a business loan or line of credit are business expansion (64 percent), operating expenses (45 percent) and loan refinancing (45 percent).
Not surprisingly, the reasons for applying for a business fit nicely with the main financial challenges businesses face.
Which are the top 3 financial challenges businesses face?
According to the Federal Reserve survey mentioned above, 61 percent of firms faced financial challenges. These are the most common financial difficulties.
Securing funds for a business expansion
This is probably the best reason to need a loan. After all, it probably means you have already have a successful business and need extra financing to reach the next level.
Borrowing to expand your business can be a great idea. However, you should still be frugal. Only borrow what you absolutely need. And don’t fall for the myth that you can’t expand your business without debt. According to a 2011 report by the Census Bureau, 31 percent of the businesses that required start-up capital launched their business with less than $5,000. Only 1.5 percent required $1 million or more.
Paying for operating expenses
Needing money to pay for operating expenses, also known as working capital, is common, particularly for start-ups and businesses that operate in seasonal industries. Per the New York Federal Reserve, 52 percent of startups (0-2 years) operate at a loss. In contrast, only 15 percent of established firms (over 10 years) report operating losses (source).
Although paying for operating expenses is a valid reason to get a loan, it’s not sustainable. So, it needs to be combined with a realistic business plan to reduce costs or increase revenue.
Making payments on debt
Paying for existing debt is a challenge for new businesses struggling to reach profitability or for established businesses with poor cash flow. A short-term loan to cover debt payment can make sense if you know business will pick up soon. Otherwise, you should probably consider a loan refinance or debt consolidation loan.
The reasons businesses don’t apply for a loan
Over half of businesses didn’t apply for financing in 2016. The good news is 47 percent of those companies, a quarter of all companies had sufficient financing.
The bad news is 25 percent of businesses didn’t apply for financing because they either thought they would not qualify (17 percent) or found it too difficult or costly to search for financing (8 percent).
This is unfortunate because it has never been easier for business owners to search for business loans. There are several websites, such as SuperMoney – where I work – that provide entrepreneurs with free expert reviews and business credit tools. These tools allow business owners to filter lenders based on their eligibility criteria, rates and terms without hurting their credit.
American business owners do well in avoiding unnecessary debt. However, there are good types of debt that can help a company grow or weather difficult times. If you need credit, don’t allow discouragement or a lack of time get in the way of your business growth. There are tools available. Do your research. Compare rates, terms and customer satisfaction reviews.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.