To make money, you have to spend money, and that’s a fact. You have to be able to invest in the costs of growth, such as machinery, advertisement, and property, if you want your business to grow.
The problem is that it can be challenging to cover all those expenses in addition to the cost of operating your business. And it is sometimes hard to pay upfront for your business needs before your business makes further progress. Unless you invest, you can’t grow. But how can you invest in your business while holding cash for operating costs in your business?
Small business loans could be the best solution for you. For small business owners, though taking on debt or a loan can seem daunting, a loan can help you finance improvements in your business that can in turn result in a high return on your investment.
Small business owners take out commercial bank loans in the hope of using borrowed money to become more profitable. In Kenya, loans can come from lenders other than banks, such as credit unions, public funds or private investors. Also, stocks or accounts receivable as collateral can be used by small businesses.
Borrowing money can be costly depending on where and how you get the loan. For instance, interest fees are involved with almost any loan. Until taking one, businesses can and should determine the amount of net interest that will be paid over the duration of a loan.
However, even with all that, there are a few reasons that would make taking out a business loan worth it.
The most obvious justification for considering a small business loan is possibly to invest in an opportunity for your business to grow. Continuing to grow your business while business is booming will help ensure that your profits do not stagnate or shrink.
Of course, there are many expenses for more development, such as advertising, new land, renovation of properties, and more staff. And it is impossible that you will have the cash on hand to finance it all unless you take it from the funds that keep your business going.
Loans will help you cover the cost of expanding your business without draining your operating funds, so that you can continue satisfying customers while expanding your business.
To Buy Equipment
Each company has the necessary equipment to do the job, such as machinery or equipment used by its customers. Machinery/equipment is costly, and over time, it wears down (wear and tear).
Unplanned expenditures such as fixing or replacing damaged equipment can break your budget. And it’s not an option to run without that equipment.
Broken or damaged equipment can also raise your liability and push away customers who need quality service, costing you more money in the long run.
With regards to the purchase of equipment, companies have two choices: they can buy it, or they can lease it.
To build up your business credit
If in the next few years you expect to apply for larger-scale funding for your business, the argument can be made to start with a smaller, short-term loan to build up your business credit.
Young businesses will also have a difficult time applying for larger loans if there is no clear credit background for both the organization and the owners to disclose. For the future, taking out a smaller loan and making regular on-time payments helps create your business’ credit.
This technique can also help you establish relationships with a particular lender such as a bank. This gives you a connection to go back to when you’re ready for a larger loan. However, be careful not to take out an early loan that you can’t afford.
Even one late payment on your smaller loan could make it even harder for you to apply for future funding than if you had never applied for a small loan at all.
To Purchase Inventory
Inventory is one of the biggest and most difficult expenses to handle in many businesses. The problem is that before your customers can purchase them and cover the expense, you have to invest in the goods you’ll bring.
You will need to constantly increase and replenish your inventory once you are running, to keep up with demand and to provide your customers with better options. When your business needs seasonal supplies, this cost is much more difficult.
You will keep ahead of trends and consumer demand without affecting your cash flow by taking out a loan to cover inventory costs.
To acquire new staff/ employees
You wear a lot of hats while running a start-up or a small business. But there is a time when bookkeeping, fundraising, marketing and customer service will surely begin to wear you and your business down. If so many tasks are done by your small team, something can ultimately slip between the cracks and undermine your business model.
Many businesses want to invest their money in their employees, claiming that this is one way of keeping their business competitive and creative. If there is a direct correlation between the hiring decision and a rise in sales, this could be a great step.
To ensure cash flow
Cash flow is often a concern for a small business. Especially when you deal with clients that do not pay for services or when you have unsold inventory that needs to be transferred to get in new items. When you consider the daily costs of your inventory, workers, services, and rent or mortgage, these problems are much more troublesome.
A short-term loan allows funds to be used for your daily operating expenses, and when earnings are low, it will help your company stay afloat. You can continue to bring in new clients to drive sales while making up for other losses by keeping money flowing into your business.
Taking up a small loan for your business is only worth it when you use the funds for the intended reasons – growth.
Before you take up a loan for your business, whichever amount, asses your business’ ability to service that loan. Because, taking the ‘wrong’ loan for your business can be costly, to you and to your business.