Companies often seek to draw investments from private and institutional investors as a means of ultimately generating more income. As the saying goes, it takes money to make money – that’s especially true as far as businesses are concerned. There are several reasons outside of simply making money that explain why businesses so frequently take out loans – we’ll get to those in a moment.
In the United States, roughly four out of every five citizens have at least some type of consumer debt. Most of them have far more than only one type of debt; being bogged down with motor vehicle financing agreements, mortgages, student loans, and credit card debt is a commonly-held combination of debts in the US.
Less than one year ago, the United States Federal Reserve Bank indicated that the typical United States household held a whopping $137,063 in consumer debt. However, there is a big difference between consumer debt and the kind of debt businesses often hold. Unlike businesses, consumers do not make money from their indebtedness. With a business, sometimes taking out a loan or financing of some sort allows them to significantly increase their cash flow.
Why would a business take a loan out for?
In most cases, businesses simply need enough cash to cover their initial costs of running the company. Corporate finance refers to cash used for this, that, and everything on a regular basis as working capital. Sometimes, it’s necessary for a business to take out loans to cover working capital.
A handful of situations arise in which corporations are urged to seek out such loans. The most common such scenarios are emergencies. Another frequently-incurred scenario in which taking out loans for working capital is required is when the scale of a business increases materially in a short period, leaving businesses stuck between not having enough resources to satisfy customers or take out short-term loans. In either of these cases, it may be necessary for a company to purchase new equipment, which is where financing said equipment can be useful.
Expensive equipment necessitates loans
Depending on the industry of your business, it might be necessary to purchase expensive equipment or supplies for your business. If you’re still working to produce significant cash flow, it can be incredibly beneficial to finance these items. A couple of examples include a new manufacturing facility necessary for scaling upwards or a new fleet of vehicles – simply purchasing them outright with cash would not be feasible for virtually any business to do.
Other times, companies need to rapidly grow their companies thanks to fast success and a lot of sales or new clients, but it’s often too fast for companies to keep up with their current employee pool and cash flow. Instead, businesses can opt to finance this growth to purchase the needed supplies and equipment.