Having a business loan can be an advantage to a business, really? Probably this might be the question on your head right now, let me say it again, yes having a business loan is a definite advantage for a business, especially when there is an economic crisis or instability in the industry. Allow me to explain further and you will understand the importance, and make sure to read the bottom line.
One of the greatest misconceptions is “having a business loan is bad”, people tend to believe liability is not good and running a business using equity or own money is always the best thing, and further they used to believe that only the poorly managed business look for loans and financing. All these myths are just misconceptions and never can be true, if you carefully analyze the successful businesses of past and present, they all obtained business loans. Let’s look at a few advantages of having a business loan.
Loans are cheaper than equity partners
Imagine you have a well-running business, to expand a business you need money, what will happen if the money comes from an equity partner?
- Ownership of your business is shared among your equity partner
- Profits are shared with your equity partner
- Decision-making issues can arise
- Your business is no more your business and you need to consult for each and everything with your equity partner
Most believe that equity partners will bear the risk and business owner have no liability if the business fails, true, but in most cases, equity partners are the reason for the business failures due to differences in business thinking.
But, if the money comes through debt financing (business loans), none of above issues will arise, business is yours, decisions are yours, profits are yours and your business is always yours, you just pay some interest rate to the lender and no more headaches to you.
Build your credit score and profit from it when the economy is bad
Most of the business go for loans when they start to face problems, usually, lenders tighten their credit process and criteria when there is an economic downturn, at this point, success probability is high for a business which already has good credit score and history compared to a business which doesn’t have a credit score and history.
Related: CRIB Report – Importance Explained
Go for loans when your business is doing well and build your credit by paying in time, this practice helps you and your business to establish a working relationship with the lenders and they understand your business when there is an economic downturn.
Also, established businesses with previous credit records will have a higher probability of better rates and terms.
To keep a positive cash flow
A successful business should have enough cash to manage unexpected and unfavourable business conditions, what if a payment gets delayed due to uncontrollable reason, having backup cash flow ready in advance is the best solution to overcome such situations, a business loan can help to keep your business afloat till the business cycle turn favourable.
To workout timely business expansion
A successful business should expand with time, all big corporations now are once a small business, you will be outdated if you wait till you save enough cash to expand, none of the businesses can rely on own cash to fuel growth, a business owner should be able to calculate the risk and should use debt finance to fuel the growth and expansion.
To strike the business opportunities
A successful business should use the opportunity to increase the revenue and profits, having a backup funding option such as a business loan can help you when there is a discounted price for your stocks from a reputed supplier or when there is an asset is available for a bargain price which can benefit your business.
To achieve better profit margins
Buying directly from manufacturers id profitable than buying from suppliers and intermediaries, you can buy directly from the manufacturer if you have positive cash flow and backup funding line, this will help you to save the margin you pay to the middleman, it will attribute to your profits and you can enjoy better margins for your sales.
Number of advantages never thought about, however, we should give some precautionary warnings as too much of good thing can cause bad results, though having business loan is a definite advantage to a business, the business and business owners should maintain very strict financial discipline, over borrowing is never a good practice, you should work on your finances to understand your requirement and obtain loans within serviceable amounts. Missing your payment can cause serious problems to your business and your credit score. Also, loans should be used for the purpose which is obtained and never use the debt to finance expenses.
Loans are like weapons and you can make peace with it, the same time it can create war if mishandled. Good luck business owners.
Contact First Trust Consultancy to get your business loan arranged in Srilanka, Call us on +94 773233114 or write to us on email@example.com