To the uninitiated, the practice of taking loans for businesses is often a controversial and misunderstood one. Many regular people conflate institutional loans with personal loans which, while similar, are very different in practice.
For one thing, businesses tend to have more capacity to increase their income or diversify their revenue streams compared to most individuals. In contrast, the income of most individuals is primarily limited to their salaries or the sale of existing personal possessions. Also, business loans are designed to enable businesses to produce better future revenue. On the other hand, personal loans cater to individual financial needs such as funding a wedding or covering medical expenses.
With those things in mind, taking out a business loan can be seen as a strategic move in specific situations. Here are eight scenarios where obtaining a loan can be the right financial decision for your growing business:
1. You’re Ready to Expand Your Operations
Whether you plan to open new branches, extend your product line, or enter new markets, expansion often means putting up a significant sum of cash. Not only do you need to acquire the capital assets needed for the expansion, but you’ll also need to put up sufficient funding to carry your new operations through their initial phase. For many businesses, taking out a business banking loan is the only realistic way of safely facilitating serious expansion.
2. You Need Equipment
For many businesses, achieving the levels of efficiency needed to stay competitive is only possible with well-considered equipment purchases. If you find that your business can only be competitive if it has access to some kind of technology or specialized equipment, a business loan can be justifiable.
3. You Need Good People Onboard
Attracting and retaining top talent takes money. Without competitive salaries, benefits, and training programs, you’ll struggle to find people who can produce substantial value for your organization, ultimately dulling your competitive edge. Taking out a business loan can provide you with the extra resources you need to hire skilled employees who can contribute to your company’s success.
4. You’ve Discovered a Market Opportunity That’s Worth the Risk
In dynamic business environments, unique market opportunities can emerge suddenly and disappear just as quickly. When you identify a promising market opportunity that requires immediate investment, securing a small business loan can allow you to capitalize on it before your competitors do.
5. You Want to Build a Legitimate Credit History
Establishing a strong credit history is crucial for securing more significant, better-quality financing in the future. Taking out a small business banking loan from a recognized financial institution and responsibly managing it can help build your business’s credit profile, making it easier to secure loans with better terms down the line.
6. You Need Financial Coverage for an Emergency
Business emergencies such as equipment breakdowns, employee accidents, or supply chain disruptions can disrupt your operations and cash flow. In these cases, a business loan can provide a safety net and operational continuity.
However, while taking a business loan in these circumstances is often necessary, ideally, your business needs to maintain enough liquidity to cover the cost of most emergencies. Make sure to build up your business’s savings to reduce the need for loans in such situations.
7. You Have to Quickly Meet Seasonal Demand
Many consumer markets experience strong seasonal fluctuations in demand.
If your business thrives during specific times of the year, a small business loan can help you take better advantage of the bump in demand by giving you the means to prepare more inventory, hire more staff, and launch seasonal marketing campaigns.
8. You Need Effective Marketing
Marketing and advertising are often overlooked by smaller businesses because of the cost involved and the challenges in determining the real return on investment. Nonetheless, well-managed campaigns are essential for growing your brand. A small business loan can fund key marketing initiatives, allowing you to reach a wider audience and shape your brand’s public perception, ultimately driving growth and revenue.
What Kind of Loans Do I Need for My Small Business?
The right loan product depends on the situation. For instance, a small loan to cover a temporary payroll shortfall will have different prerequisites compared to a more substantial business banking loan intended to finance the opening of a new location.
Larger loans for businesses often require collateral, substantial documentation, and a more comprehensive evaluation of the business’s financial health. However, finding the perfect loan product each time can be a challenge for small-to-medium enterprises (SMEs), and many simply cannot afford the collateral needed to secure a quality loan.
In some markets like the Philippines, SME-focused products from Neobanks or Fintechs, like the Maya Flexi Loan, have emerged to address these issues. These products typically have no collateral requirements, reasonable interest rates, and flexible payment schedules, doing away with the need to tap into inappropriate business loan products or problematic informal financing. By leveraging SME-focused loan products, businesses can safely access the capital they need to cover short-term gaps or to embark on growth initiative.
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