What Are The Most Common Reasons Small Businesses Seek Financing?

by Debi Enders

In 2017, about one in five small businesses sought a loan or line of credit, according to a recent survey. Most often, they sought this financing from their primary bank. Here are five of the most common ways they use those funds:

1. Working capital. Small businesses need cash to operate. Businesses with tight cash flow due to seasonal income fluctuations, unexpected expenses or slow-paying customers often seek a line of credit. Many use these funds to purchase inventory, cover payroll or finance other short-term needs. In other cases, they leverage the additional funds for marketing and advertising campaigns, websites, and other promotional efforts that help raise awareness and generate sales.

2. Debt consolidation or restructuring. Sometimes businesses wish to consolidate their debts in a single loan. Refinancing existing debt can result in lower monthly payments and shorter repayment terms, freeing up cash for working capital.

3. Business expansion. When a business adds a new product or a large order comes in, businesses often take out loans to obtain the extra funds needed to add staff, inventory or office space.

4. Equipment purchases. Machinery, vehicles, computers and other office equipment must be upgraded or replaced on a fairly predictable basis. Many small businesses finance these purchases with loans that can be repaid over the life of the purchase.

5. Relocation or remodeling. A business sometimes outgrows its space, or changes in customer demographics may behoove it to move to a more desirable location. Whatever is driving the change, many seek loans to fund the relocation and remodeling.

If any of these scenarios sound familiar, start talking with your banker now.

Debi Enders (debi.enders@commercebank.com) is vice president, small business banking at Commerce Bank.