Do you know when you should go for a loan to start your new business or existing business? Read the reasons & situations when to avail of a loan.
If you want your money to grow, you have to spend money. This is especially true for a business. If other operations of the business are well managed, adding capital can be wonderful for its growth. However, timing and efficiency in getting and using capital are important.
One of the most common ways to raise capital for your business is to take a business loan. A loan is also a better source of capital for a profitable business in comparison with the share capital as you can have better leverage. You enjoy the surplus of the rate of return over the interest you pay for the borrowings. As a businessman, you should not be scared of taking loans as they can enhance the scope of your business by aiding in expansion.
When to take Business Loan
There are situations when you can choose to borrow money to fund your business activities. You can avail a business loan in situations where:
- The business plan is strong
- You can envisage the flow of money
- Return on capital is higher than the loan interest
In the following situations you can take benefit of a business loan:
Starting a New Business
One of the most common situations to take a business loan is while launching a new business. It needs a good project report based on the potential to earn good profits. The lender certainly wants to ensure the repayment of the loan amount. Your project report must reflect the prospective earning capacity of the proposed business. If you are a new entrepreneur with a good business idea, a business loan can give you the opportunity to convert your business idea into a potential earning venture.
However, whenever you are at the start of a business, you must ensure that your overhead costs are not so high that the business and its expected profitability are affected. So just a word of caution: in case of new business, think twice before plunging for a loan!
Expanding Operations for Smaller Businesses
Expanding business required capital. Debt financing could be an excellent idea to fund the assets required for new operations because the cost of debt is lower than the cost of equity. You may need money for up-scaling the production/operations, opening a new division, launching a new product or penetrating a new market/area.
It is usually easier to get a loan for a running business since you have a proven track record. So, create financial leverage by adding more debt to a profitable business.
Arranging for Working Capital
You may require a loan to feed your routine expenses such as salaries, utility bills, raw material, and supplies. The paucity of funds should not stop operational activities. So, funding these activities would enable you to maintain the regularity of your business operations. Manufacturing units, larger operating cycle and market boom can demand more working capital. Many banks and financial institutions offer a working capital loan.
Buying Machinery and Equipment
If you deal with a product/service with high demand, regular supply becomes the critical factor. An increase in production capacity by adding more machines and equipment may call for additional capital. You can go for introducing new technology or automation to cater to the demand. Taking a loan to strengthen the production infra will boost your supply.
Making Repayment of Other Loans
When you are worried about repayment of numerous small loans, it is a better option to go for a big loan and settle up small debtors. This will give you mental peace. Converting many small debtors into a single one could save you from dealing with many parties.
Managing Cash Flow
Managing cash flow is always a challenge for small businesses. Thus, if the smaller businesses are unable to meet the liquidity requirements for working capital, such as overhead salary, rent, inventory management, and utility bills, loans may be the solution.
Turning Around a Sick Business
A sick business unit can demand the money for its turn around. Of course, arranging money for revival is a tough task. But, if supported by a sound revival strategy and a practical plan, the borrowing request can be considered by the lender. New product planning and substantial operational changes can convince the financing firm. No doubt, debt servicing could be somewhat difficult in the initial days. However, making a sick business into a profitable one not only adds to your financial health but also to the health of the national economy.
For seasonal businesses, managing cash flow at the time of the peak season is a concern for all cyclical businesses, be it new or stable. Thus, a short-term business loan is the answer to their needs for all such reasons. In this case, a short-term financing option loan is the right solution and can be repaid as soon as the payments are done after the season is over.
Remember, ease of taking a loan is not the only factor in opting for a loan. What is crucial is the efficiency of using the borrowed funds to make handsome profits.