Most businesses benefit from an extra infusion of cash, especially when they have a solid plan in place to turn those funds into profits. However, every business owner is likely to have a different attitude towards seeking out a loan for this business. For some, the prospect of taking out loans can be downright intimidating and they are not to blame. Loans can be expensive; not only are you piling up your liabilities and the interest payments that need to be made on a regular basis, but some loans can go on to require collateral or personal guarantee, which means there is a lot on the line in exchange for the funds.
While it is true that some reasons are not justified reasons to seek financing for your business, there are plenty of scenarios where a loan makes perfect sense. Most of the time, if your business can meet the cost and find the right terms, a loan can provide you the cash injection needed to grow, get through tough times or improve your existing system for the better.
If you are considering seeking financing for your business but are just a little hesitant, here are some good reasons for your business to take out a loan:
1. Working capital
Sufficient working capital is the key to the business’ survival in the short run and not having enough could easily lead you to failure. A working capital loan can help the business cover the gap between customer payments and routine expenses, ensuring that it has the funds needed to meet its immediate payment obligations at all times. They act as a ‘safety net’; in case you face an expected cash shortage, you know you have a back-up plan to meet day-to-day expenses. Seasonal businesses, in particular, can apply for working capital loan to meet expenses during slower periods.
2. During the startup phase
Businesses that are just starting off often seek funding to pay for the initial startup expenses. While most entrepreneurs do have some funds of their own to launch their business, they are unlikely to be sufficient to cover all of the startup costs and some form of external financing will be required. This financing could be used for anything from purchasing assets or inventory to hiring staff or marketing. However, it is often difficult to secure startup financing as new businesses are risky investments for the lender. For this reason, loans from family or friends, alternative lenders or angel investors are often the best funding options for a startup.
Many of the smaller businesses find attractive growth opportunities from time to time but may not have the extra funding available to invest in them. Whether you are considering opening a new outlet, introducing a new product or hiring additional staff, every growth plan requires a cash infusion to execute it. A loan can be a great way to take advantage of growth opportunities; the business can use the funding to finance growth plans and once the additional profits start coming in, the business can repay the loan.
However, in order to qualify for a loan, the lender will want to see detailed financial planning on your part, including cash flow projections that show that you will be able to repay the loan. You will also be required to provide a detailed plan on how you plan to use the funds, the amount you need and the impact the loan will have on your business.
4. Purchase of equipment
Purchasing of equipment for the business is usually expensive and most of the time, the funding has to come in the form of a loan. The business has the choice of buying or leasing equipment, both of which come with their own pros and cons. If you choose to purchase equipment, you get significant tax write-offs in the first year. It is a feasible option, especially if the business knows it requires the equipment over the long-term and it won’t become obsolete.
Equipment financing works as a good option for this purpose; these loans are payable over 5-10 years with fixed monthly payments, giving the business the option to pay for the equipment as benefits are generated, instead of having to purchase it outright.
5. Hiring of fresh talent
There comes a time when the business may find that its existing staff simply cannot cope with the workload any longer and it needs to hire fresh talent to ensure the smooth running of its operations. Small businesses often start out with limited members of staff; the owner may be carrying out as much of the functions himself as possible to keep costs down initially. However, as the business expands or experiences a shift in its human resource needs, it becomes essential to hire additional staff members who can take the business forward and ensure it stays competitive.
The markets today are highly competitive and unpredictable; unless the business is constantly finding new ways to maintain its competitive advantage and stay ahead of its competition, it is likely to lag behind. However, advertising and promoting the business requires funds, which are not always possible to generate from the business’s own resources. A loan can allow the business to invest in effective marketing campaigns, and pay them off once the revenue starts coming in.
7. Debt restructuring
Many businesses can benefit from a loan that helps consolidate their existing liabilities and reduce the overall costs on different loans. A larger loan with a lower interest rate can be used to refinance the smaller, more expensive loans. This kind of debt restructuring makes managing the business’ finances a whole lot easier as you have fewer monthly payments to keep track of and can even reduce your interest costs.
THE BOTTOM LINE
At the end of the day, there are many justified reasons for seeking financing for your business. All you have to do is carefully evaluate the terms and conditions on the loan along with your ability to pay it off before you opt for it, in order to avoid getting into financial trouble. Seeking external financing is all about making smart, well-calculated decisions that will help take your business to greater heights in the long term. So, don’t be afraid to take a leap of faith and watch where it takes you.