Loans have received a bad reputation over the years and especially in relation to SMEs.
However, with all the new industries appearing over the years, more and more entrepreneurs are born. Small business owners are wary of debt financing because of the stories and misconceptions they’ve heard. Falling into the endless debt trap sounds terrifying. Many only think of taking loans when they are experiencing financial difficulties, and even then it remains an uphill task because it means accepting that they’re not doing well.
Taking up loans isn’t only for the cash strapped business owners. It is actually for those that aren’t risk-averse or those we are seeking to upgrade their company. Large companies with big brands under their belt also take loans but for the right reasons. Their objective will be to bring the company to the next level.
Good reasons to take a loan for an SME
To better explain the line of thought in some of the successful SMEs, here are some situations that make sense to take a loan for a small business.
Businesses are growing and for growth to happen effectively, it usually requires money. Any excess money in business will most likely go into building its capacity and generally growing it in whichever way that is relevant.
It is possible to expand using regular cash-flow, but the speed at which it will happen may not be appealing. Taking a loan gives an instant cash injection into the business thus increasing the speed at which expansion can occur. It will also ensure other monies go towards operational costs thus keeping the business expanding and running.
2. Capitalizing on business opportunities
Sometimes offers come up and the business could use that particular item being offered at a reasonable price. A loan comes in handy to acquire such things, especially if it is a capital-intensive item required such as machinery or a vehicle.
A business must have an inventory before it can make any money. Inventory comes in large amounts for it to be economically viable and the situation is worse if inventory is for seasonal items.
An inventory loan will help keep in step with trends so that business continues throughout even if previous stock for a different trend hasn’t sold out yet. It also helps to keep cash flow intact.
4. Eliminating cash flow issues
Cash flow can be a big problem for small businesses. With a stock that isn’t moving fast enough or clients that haven’t paid for goods yet, it can be difficult to have steady cash flow. Having enough money on hand is important because items that require regular payment such as utilities, rent and staff depend on it.
A business can solve this problem with a short-term loan to ensure operational costs are catered to as required. Money must be flowing in a business to keep customers and all relevant stakeholders satisfied.
5. Building creditworthiness
Qualifying for a large amount of credit requires a good payment history. Creating a good history involves starting from a small loan and paying faithfully to remain in good standing with the lenders. With time, lending institutions develop confidence in the business person and are more willing to take a risk and give them a much larger loan if requested.
SMEs will always need more financing along the way, and this is an excellent way to ensure they don’t miss it. Doing this responsibly will increase business credit score thus improving chances for the future.
6. More affordable compared to equity financing
Many look at equity financing as a better option compared to debt financing but this is only on the surface. While the risk is reduced and transferred to the investor from the owner, losing a part of the business interferes with things. Management decisions are no longer the preserve of the owner because most investors like to have a say on decisions. Losing both a stake and autonomy can be very frustrating. The business will have less debt and more cash at its disposal, but the price may not be worth paying.
Debt financing provides tax benefits since interest is tax deductible. The amount of taxable revenue automatically decreases. Paying out dividends is not tax deductible meaning the amount remains the same.
Loan payments rarely fluctuate as compared to equity prices. This makes it easier to plan for expenses and future payments.
Debt financing is great but can easily be a pitfall if not correctly handled. It is vital that businesses keep their debt at reasonable levels. Taking out too many loans can become difficult to pay back putting the business in trouble. Borrowing wisely is crucial and so is spending the money wisely after borrowing.
Where the money will be used to buy items directly or indirectly involved with the success of the business, business owners must calculate the projected return on interest and ascertain that it is worth investing in. Most importantly, paying back the loan is paramount to the success of the business.
Traditional financial institutions may drag their feet in offering SMEs loans for different reasons, but peer-to-peer loans from crowdfunding platforms came to fill that gap. The procedure is faster and less cumbersome for those interested.