Money Management
November 11, 2024
As a business owner, have you ever had to consider if you should take a business loan but are not sure whether your reasons are good enough? For example, is business thriving and you are thinking of opening a new branch in another town? Or are you thinking of introducing a new product line to the already existing business? Well, you are not alone. Business loans can be an enigma.
There are many reasons why an entrepreneur might consider taking a business loan. Some are good, and some are not so good. But although not all reasons are good, every seasoned entrepreneur will tell you that -if well utilized - business loans can be the backbone of a successful business. A loan can be just what you need to propel your business forward.
Although you can indeed sustain or grow your business by diligently ploughing back the profits, a loan can come in handy to help expedite the process. For example, suppose you have two options. Wait two years for the business to raise enough funds to purchase machine 2.0 that can immediately triple your production or apply for a business loan that will allow you to purchase the machine today and improve your production today. Which option would you pick?
Many would go with option two, right. If your production goes up ten times - and assuming there is enough demand - you can quickly raise enough to pay off the loan while the business is still enjoying the loan benefits.
However, even with all the advantages, business loans also have their downside. For example, suppose the business does not generate enough revenue to service the loan. In that case, the lender has the right to dispose of the collateral or even confiscate your business assets to recover their money. Woe unto you if this collateral was a crucial business asset.
Therefore, when weighing your options, keep in mind that loans eventually have to be repaid, in full and with interest. If you are considering taking a business loan, you want to have a reason good enough to justify the cost of credit.
Here are 10 good reasons to take a business loan.
One of the main reasons entrepreneurs apply for business loans is to expand/grow their business. If you plan to invest in a new product, open new branches, or improve production, a business loan can be a great idea.
Even when business is booming, taking a loan to fund an investment, e.g., buying a piece of equipment that can make production more efficient, can help increase the revenue. With this, the business will be able to increase returns, which can be used to repay the loan as the business continues to enjoy good returns.
If you have big plans for your business, you will probably need a big loan in the future. The idea is to start building credibility now so that when the time comes, you already have a track record - otherwise known as business credit history.
It is hard for a business - especially an SME - to qualify for a larger loan if the company (and sometimes the owner) doesn’t have a strong credit history. Taking regular small loans and ensuring to repay them on time helps you build strong business credit for the future. However, ensure that the loans serve an essential business purpose and not just to build a good credit history alone.
All businesses need some type of machinery, IT equipment, and software or other business tools that help make the work easier.
The truth is, some of these items are expensive, and not many businesses can afford them without some type of financing. Also, sometimes the equipment might need unplanned repair or replacement, without which your business can not continue operations.
In such a scenario, a business loan can come in to save the day. In general, business loans can be exactly what you need to keep your business technology up to date, improve your product or increase your production.
Business is inventory. And if you can not continually replenish your stock to meet the demand, what business are you doing? But it is not easy to keep a plentiful stock of high-quality options if your business has yet to break even and you have not realized any return on capital - especially if you are in a seasonal kind of business.
Therefore, taking a loan to increase your business inventory is definitely a strategic decision. For example, suppose there is an in-demand product you need to stock up quickly, but you are currently tight on cash. Taking a loan to stock up on this product to meet the market demand is a great reason to take a business loan.
Imagine, after doing your research, you find that opening another branch in a new town can raise your revenue by 30%. But then, you do not have enough liquid cash at hand to take advantage of this opportunity. What do you do?
In such a case, the potential return outweighs the debt burden. You have to talk to a potential lender immediately and ensure you do not miss this opportunity. However, be sure to carefully consider the pros and cons to ensure that the business will be able to service the loan.
Are you working 18 hours now instead of the usual 12? Or do you have your team working overtime six days a week? If this is happening, maybe it indicates that your business needs fresh new talent.
Even without the working hours indicating the need for a new workforce, it reaches a time in a business journey where you will need to hire experts for specific tasks in the business.
For example, it may be easy to do quick bookkeeping by yourself and keep the company books clean when it is still small. However, after a certain level, you will need to hire a qualified accountant to deal with the business’s accounting and tax side.
If the business cash flow cannot accommodate this change, maybe a business loan is the way to go.
You are lucky if you have been in business long enough and haven’t had to worry about cash flow. Cash flow is a challenge for many businesses, especially SMEs. It can be especially tough if you are dealing with goods and services that don’t need customers to pay immediately or when you are dealing with slow-moving stock.
Sometimes you need a cash flow boost to help pay staff wages, rent, and other overhead. This is where a business loan comes in. It allows you to cover the urgent cost while allowing you time to develop better business strategies to bring in more revenue.
Are you trying to develop a marketing strategy? Or do you feel like your existing marketing strategy is not targeting the correct audience? Are you thinking maybe your revenue would be better if you change your strategy?
An effective marketing strategy is unique to the specific business. If you feel like your business needs a whole new marketing strategy, maybe you are right. But what do you do if you do not have enough cash to finance a new plan at the moment?
Well, a business loan might be just what you need. If well planned, taking a loan to finance a well-structured marketing strategy can be a great business strategy.
Do you need to move your business to a new location that is more vibrant? Maybe your main target clientele is the middle class, and you figured that moving your offices to an uptown area will positively impact the business.
But such a move has many expenses that you might not have the necessary finances to cover: new premises, renovations, additional staff requirements, etc.
A great way to finance this is to take a business loan. A loan can help you cover these expenses without the need to stretch your business cash flow too far.
Sometimes, you can have great sales but struggle with operating capital. This is because the most significant chunk of your sales is held up by debtors.
Given that invoices have a typical 30 days or more to clear depending on your agreements with your customers, you will need a strategy to have cash at hand before your debtors pay if a significant percentage of your sales are in credit.
Thankfully, there are many options available to help save the day. Several types of business loans can help you deal with unpaid invoices, e.g., invoice factoring, invoice financing, etc.
Many wealthy people make money by using other people’s money - they borrow money to make money. That is essentially why business loans exist. You borrow from a lender to fund a strategic business goal that yields profits for you that you use to pay back the loan and have even more left for your business.
As such, any decision to borrow money that cannot be tied to a business’ profit motive is considered a bad borrowing decision. That said, the consideration doesn’t have to be a direct contribution to business profit (instant results), but nevertheless an indirect route to profits from the business loan must be established to justify the cost of borrowing.
If a borrowing decision does not satisfy this requirement, then you are likely to lose money and put your business in jeopardy.
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