There are many types of business loans depending on what market the business is in but for sake of an argument to explain the usefulness of a business loan lets choose the industry of real estate. When a person hears real estate many traditional approaches to the business is to become a licensed agent and collect a percentage usually 3-6% depending on what state that person is licensed in per closing/per sale. The reality is that in the business of real estate where the money is made is not when you sell the property but when you actual purchase the property. Therefore the person who is the investor who is purchasing the asset is the one that is actually making the most money as long as the property has the right profit margins forecasted.
For example, an investor could start off by going to the public auctions and analyzing prior the auction all the residential properties that are going to be auctioned off. The savvy investor will do a CMA(compare market analysis) and determine how much rehab each property will require to flip the property or if his/her strategy is to hold to rent out. Its not unheard of seeing properties be auctioned off at a huge discount simply because the bank owner normally known as the trustee depending on the state is needing to get rid of the property due to foreclosure process. The investor buys a property and then start the remodeling process. Typically the investor will rehab the property in full to put it back in the market to sell at maximum market value.
How does a business loan go into effect? Well lets use these numbers to explain the process. Lets say an investor buys a property that is a 3 bed, 2 bath, 1800 sqft. that is worth on the market for $130,000.00 and he purchased that property for 60,000.00. Prior the auction he knew that the house needed some work done and was willing to spend 60k because he knew that the rehab cost will be under 30k. So the investor purchases the property and now he needs to spend another 30k to rehab the property. Once the property is remodeled after a few months work, the house will be sold at max value leaving the investor with 20k profit considering that he will not get 30k difference since there is closing cost involved.
Now where did he/she get that money to buy the foreclosure? Well many business loans exist where he would be able to do something like that but if he is like the majority without a great line of credit the business loans will be reluctant to provide a loan on a asset that is not inspected. So if he/she cant come up with the initial funds to purchase the asset then his strategy needs to change.
The investor might be able to access what is known as a hard money loan. Which the percentages is higher and usually has a point system in when the loan needs to get paid but its a business loan that will allow the investor to acquire an asset and have the funds to remodel and at closing the funds get transferred to the loan as a lien on the property and whatever is left as long as the rehab cost numbers where done correctly he/she will keep the remaining profit.
The benefit with the business loans as you could see is that no matter what is the niche there is a loan for it. Normally a loan is needed to get things started for any business especially for the example provided regarding real estate. Obviously, there is a lot of risk but there is that saying, “Where there is no risk there is no reward”.