Why Do Businesses Need Bank Loans?

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Many businesses begin operations on a shoestring, and some entrepreneurs never seek bank loans or other outside funding. However, many new and established businesses need bank loans. Without bank loans, many entrepreneurs find it difficult or impossible to launch their businesses. Some business owners need bank loans to finance the growth of their companies. Others may need bank loans just to keep the doors of the business open.

Startup Capital

Many traditional lenders shy away from providing startup capital to new businesses. However, the Small Business Administration provides guarantees for loans made through participating banks to allow new business owners and entrepreneurs to obtain startup capital. Startup capital loans almost always require a well-executed business plan. In addition, conventional lenders will nearly always require the borrower to offer significant collateral for the loan. Lenders will probably also consider personal credit along with any established business credit in making their lending decisions.

Equipment Purchases or Leases

Some businesses need little or no equipment, while others, such as retail outlets and restaurants, will require large outlays for equipment at every phase of operations. Many business owners seek large term loans with fixed due dates and interest rates for such expenditures. Lenders usually require a history of operations before granting a loan specifically intended for equipment purchases or leases. However, a line of credit allows businesses the flexibility to purchase or lease equipment whenever it is needed.

Business Expansion

Businesses that have enjoyed success and wish to expand may find lenders to be more receptive to offering loans. Both banks and venture capitalists are possible sources for additional funding at this stage. Business owners often seek term loans for specific expenditures, such as larger office or manufacturing space, although a line of credit offers the flexibility of drawing on funds as needed -- for instance, to create one or more new positions within the company.

Contingency Funds

The old truism "banks only lend money to those who don't need it" often applies to business owners who seek loans to cover lean periods and shortfalls. If at all possible, obtain a line of credit during times when the business is doing well to sustain the business during difficult financial periods. Businesses that must borrow funds during periods of financial downturn often face high interest rates, when they are able to obtain financing at all.

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