Whether your construction company needs new equipment, or your storefront needs more space, chances are, you need money to do it—and that often means taking out a business loan.
While the idea of borrowing money to build your business may seem risky, financing is, in fact, a conventional practice companies use to ramp up quickly and achieve sustainable growth.
"As individuals, we're conditioned to think of debt as a bad thing, but for businesses, it can be an incredibly powerful tool when used wisely," said Justin Reiter, group manager of business banking with Bank of Albuquerque. "Smart companies use debt to invest in themselves and seize opportunities that would be out of reach without financing."
Borrowing has its advantages
Bold business moves rarely come cheap. And, chances are, your company isn't in a position to dole out tens of thousands (perhaps millions) of dollars in cash for major purchases, Reiter said. "A business loan can allow you to kickstart growth without huge upfront costs, and you can pay it back over time as your business gains momentum."
Even if your business is flush with cash now, spending it may not be the best strategy, he added. Financing major purchases allows you to keep the cash you have on hand as working capital, ensuring your business will be able to handle recurring obligations like rent and payroll, or unexpected emergencies.
Furthermore, business loans can offer various tax advantages, including the potential to deduct interest payments from gross income (subject to IRS criteria), which helps offset the cost of borrowing. Check with your banker and/or CPA for specifics.
There's a loan for that
"We can help companies across a wide variety of industries finance the purchases they need to make," Reiter explained, highlighting some of the most common ways businesses use debt as a growth accelerator:
- Equipment and technology. It could be a new company vehicle or multiple to update your fleet, construction machinery, kitchen equipment or a bank of servers—some businesses just need the right gear to be successful.
- Real estate. Whether a business owner wants to buy an existing space, remodel an old office or construct a new building, they need financial support to get it done.
- Business expansion. Opening a new location or launching a new product? It takes funds to outfit a new space, ramp up manufacturing or hire additional staff.
- Inventory. As retailers and wholesalers grow, they need to keep up with customer demand.
- Marketing and advertising. A splashy promotional campaign can build awareness and drive sales—for a price.
- Business acquisition. Sometimes the fastest way to grow is to buy out a competitor or a complementary business. There are loans for that, too.
With a solid business plan and the right financing solution, the opportunities for growth are near limitless.
Start with the basics
Researching loans can get confusing, as many banks use different terms to describe their lending products. Reiter recommends starting by considering a traditional term loan from your lender of choice. Much like a personal car loan or a mortgage, with a business term loan you'll repay a monthly amount of principal plus interest over a specified period. Borrowing from a bank may require you to have a good credit history or put up collateral, but this option typically offers lower interest rates compared to credit cards or lines of credit. Many banks also offer a variety of specialized business loan products designed to finance purchases like equipment or commercial property, for which the repayment terms may vary.
You might also consider U.S. Small Business Administration (SBA) loans, which are offered through approved lenders. These loans are partially guaranteed by the government and put a cap on the interest rate lenders can charge. The downside of SBA loans is they require some additional steps to qualify and typically take longer to get approved.
Ultimately, explained Reiter, the best approach is to speak with a lender you trust who can offer objective advice on financing solutions.
"Structuring loans is an art and a science, and there are many different ways to customize the terms," he said. "Our job is to get to know your business and find a lending solution that will help you succeed, not put your finances in jeopardy."
But what about interest rates?
Today's interest rates, while still well within historical norms, are considerably higher compared to a few years ago. As a result, you might be hesitant to move forward with financing growth plans until interest rates fall.
Reiter said he understands the concern, but he also cautioned business owners not to forgo promising growth opportunities for that reason alone.
"The truth is not even the experts can time the market—we don't know if or when the Fed will lower interest rates, or by how much," he said. "If a loan is what your business needs to succeed and thrive, there's no time like the present."
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