A business loan is a kind of financing which is specifically used for either expanding the business or funding its expenses. A business may also seek a loan for purchasing raw materials for production purpose.
There are many types of business terms loans available from a variety of lenders. First of all, there is the term loan which gets disbursed in a lumpsum amount. Repayment of the term loan may have range over a period from 1 year to 25 years. The borrower also needs to pay interest on the outstanding amount at an agreed rate until the retirement of the loan.
The second option is the credit line. It involves obtaining a line of credit from a bank or a financial institution from which the bank can draw money as and when it needs it. The borrower is required to pay back the amount along with the accrued interest to the bank in instalments. The borrower I required to pay interest only on the amount that he has drawn from the credit line.
There are many ways through which obtaining a loan can boost your business. Some of them are listed below for the benefit of the reader.
Provides Help in Expanding Your Business
Most people believe that a business seeks loan only when it is strapped for cash and cannot find another way of obtaining it; This is not entirely true. A business may have healthy and steady cash flow but could still need extra cash when it is seeking to expand its operations.
Take, for example, a businessman who is running a grocery store. The store is doing fine. It is generating reasonable revenues and does not have a cash flow problem. But the owner of the grocery store may decide to open another similar tore in another area. For this purpose, he does not have extra cash available. Since he is running the same business successfully, he understands the intricacies of the business and is sure that he can run another store as successfully as the first one.
Such a person can easily obtain a business loan from a bank or a financial institution. The bank or the financial institution, which provide the loan, will deem it a safe investment because there is very low risk involved, and already establishes the revenue generation capacity of the prospective borrower.
Thus, the loan from the bank will help the owner in expanding his business and generate more revenues.
Allows the Owner to Retain Control of the Business
When they need cash, a few business owners will seek out investors who are willing to invest cash in the business. But, they would need a share in the equity of the business in return for a cash injection.
For most entrepreneurs, this is not a viable option because the investor having shares in the business will also get control of part of the business, and may want to exercise this control for meddling in its operations; This poses problems for a business owner who has been running his business in his way and does not welcome any interference.
Another good thing about a business loan is that the borrower is only required to pay back the principal and the accrued interest amount. The lender has no recourse on the profits of the company. An investor, on the other hand, will not only get control of the company, but he will also share the profits of the company.
A business loan is the best option for obtaining that much-needed cash injection without having to lose control or share profits with anyone.
Provides Inventory Management Support
Sometimes, a business would run low on its inventory; This usually happens during the holiday seasons, or when it gets a big contract.
In such a scenario, a business credit line can become very useful. It allows the business to draw a specific amount of cash from the line provided by the lender and use this cash for replenishing the inventory of the business.
Once you have the inventory, you can start processing without a deal so that you can meet the seasonal demands, or fulfil the contract.
When you receive payment against your sales, you can not only pay back the lender but also pay the entire interest on the amount to draw from the line.
This loan proves to be a great boost to the company at a time when it needed this boost more than anything else.
Allows Hiring of More Staff
When the business is growing, it requires more people to keep pace with the increasing production, sales and marketing operations.
The business may hire these people at any time, but the problem arises when they are required to provide salaries for their services.
The business may have enough cash available to cater to its existing payroll, but it may not be able to pay all the new staff with its current cash flows. It is sure to get more revenue through increased sales, but that cash will be available after some time.
When such a situation arises, a business loan allows the owner to take care of the increased cash flow for the time being until the collection of cash against sales.
Sometimes, a business owner would know that hiring new staff is imperative for business action but would shy away from the idea owing to its limited cash flow; This results in many missed opportunities.
A business loan allows him to hire the staff as soon as possible without having to worry about paying them from his existing cash flows.
Helps in Managing Business Cash Flows
Just like seasonal boosts, a business may also experience seasonal lulls; This affects the cash flows of the business.
The cash flow is the lifeblood of any business, and any disruption in incoming cash can seriously hurt the ability of the business to carry out its operations smoothly.
With the help of a business loan, the business can bridge its cash flow gaps without any problem until the lulls stop and normal business activities resume.
The Final Word
There are many ways borrowing can boost your business. We have listed some obvious examples above. However, any business may seek out a loan depending on its particular needs at any given point in time.
When the business owner sees that there is a need for cash for any reason, he should not shy away from requesting a bank. Rather, he should carry out a cost-benefit analysis of the loan, and request a lender if he deems fit.