Business Knowledge Hub

Five reasons to consider getting a business loan

A business loan could help boost your company's return on investment in the long term. Read on to discover five reasons why businesses may consider taking out a business loan.

If you want to see your business grow and expand, at some point or other you’ll need to invest in it. Whether you’re a small business, a start-up or an established company, managing these expenses and paying upfront can be costly.

One solution you might consider is a business loan. The prospect of acquiring debt can be daunting, especially when you’re looking to grow your business, but borrowing capital can help boost your company’s return on investment in the long term.

Today, we delve into five reasons why getting a business loan could be right for you.

What are the five reasons to consider getting a business loan?

1) Cash flow

Cash flow can feel like an unending conundrum for some businesses, especially when it’s made worse by late-paying customers or unsold inventory taking up space designated for new products. These kinds of issues can become magnified when you factor in the costs of utilities, staff and rent or mortgage repayments.

For some businesses, a business loan can help manage these issues. If you have a solid business plan and a good credit score (or even if you have a bad credit score), the bank may offer you short-term capital to help tide your business over. Working capital loans are short term loans designed to cover a business’s immediate finance needs but, as they are riskier to banks, they tend to come with higher interest rates. They can be either secured loans or unsecured loans.

If the businesses’ earning assets fail to generate a profit or the company experiences mismanagement either at their beginning or during a particularly crucial period, there is only so long a company can continue before it can no longer make ends meet

Sometimes, a credit line can provide the cash you need to keep your company afloat by providing it with the requisite working capital for day-to-day operations and allow revenue to get back on track.

2) Inventory

Many businesses would consider inventory costs their most difficult expense to manage, because products must be invested in before sales can offset that cost. Once the company becomes operational, it needs to continually replenish and expand its inventory to keep up with demand and offer better and more varied options to their customer base. By offsetting inventory costs with a loan, you can stay on top of demand and abreast of trends — without hurting your cash flow.

The expense of inventory can become even tougher to manage for companies affected by seasonality, such as those working in agriculture, retail and hospitality. These companies could benefit from a short-term business loan to maximise their inventory during their peak seasons. You must be confident you can strategise to repay this come the end of this period, using the proceeds from the seasonal revenue.

3) Expansion

When business is booming, growing the company further can be integral to ensuring profits don’t plateau or diminish. Growth entails many costs, not least for properties, renovations, advertising, inventory and staff. You may not have that kind of cash flow available to you, unless you were to take it from the very funds that keep the business functional.

When you’re seeking to expand your business, a bank may be more likely to grant you a loan if you’re an established company turning a healthy profit. If you’re looking for a loan for a new property for your business, this can be funded through a commercial mortgage for businesses looking to buy non-residential properties. They require quarterly or monthly payments from cash flow or profits. There will also be an interest rate associated with the repayment scheme.

4) Equipment costs

High-quality equipment is costly, yet it may also wear down. Unplanned expenses such as the replacement or repair of faulty or outdated equipment can place great strain on your budget, yet the company may not be able to remain operational without it. What’s more, broken or unreliable equipment may increase your liability and put off prospects who demand consistent and professional service.

Equipment can either be bought or leased. If you buy equipment then you may be able to take a tax write-off and subsequently depreciate the equipment over its economic life. You can then sell it for salvage value. A cost-benefit analysis may well be called for in such a situation.

Asset finance is a type of loan that gives you access to business assets such as equipment and machinery, or allows you to release cash from the value in the assets you own. Generally speaking, there are two types of asset financing – lending secured against existing assets, and equipment finance to get additional assets.

A loan can be a godsend when it comes to managing the costs of that equipment which is integral to the running of your business. Updated equipment in good working order improves your service, enhances your reputation amongst consumers and serves to help you turn over a profit in the long term.

5) Improving terms on a larger loan

If you predict that your business will need a major loan in the future so it can more effectively expand or grow, taking out a smaller loan in the meantime is one option that has the potential to improve your company’s credit score. As long as you take out a small enough loan that you can comfortably repay, you could be on track to improve your credit history. This will stand you in good stead when it comes to qualifying for more favourable rates in the future.

Could a business loan be right for me?

No business owner relishes the prospect of taking on debt, but there are times when a loan could be the ideal solution for not only keeping your business afloat, but for flourishing. A cost-benefit analysis is advisable before taking out any loan, and remember to account for the total interest that you would need to pay. If the loan has the potential to significantly boost your revenue, the time may have come to consider your options.

When it comes to looking for a loan and preparing your business loan application, whether you’re a small business or an established company, doing your research could help you find a business loan that’s right for your company.

Written by Peter Adams

    Published on 23-03-2020

Peter reports on a number of areas in the personal finance sector, with a particular interest in supporting businesses and individuals in the UK services industry.

If you have any feedback on this article please contact us at [email protected]