How SME owners can use a business loan to invest in the growth of their company
Wednesday, September 19, 2018/
One in four business owners are looking at taking out a loan in the next 12 months, according to a recent SmartCompany survey. Whether the loan is to increase the available stock on-hand or to cover the cost of hiring and training new staff members, a business loan allows SME owners to invest in their business.
Taking your business into debt is not a decision to make lightly, and some people will caution you against it. In some cases, taking out a business loan may not be the right strategy – but in the right circumstances a loan could give you the funds you need to strengthen or grow your business.
Despite the challenge small business owners face when trying to access funding, right now in Australia, there has been a surge in non-bank business lenders who are ready and willing to give small businesses a go without the hurdles of the big bank lending process.
Here are six reasons why you might take out a business loan to support the growth of your business.
1. To recruit, develop and retain great people
The long-term success of your business will depend on the skills, knowledge and commitment of your team. Extra capital could help you invest in hiring, training and motivating a team who will take your business to the next level.
Whether you need front-line staff or board-level talent with the skills to complement your own strengths, good people can be one of the best investments you could make.
2. To invest in equipment
To stay competitive, it may be essential to keep your technology up to date, or buy equipment to provide new products and services to your customers.
There are several ways you can finance the purchase of new equipment, including equipment loans that can be matched to the anticipated lifetime of the asset. Using your new asset as security can make it easier to qualify for a business loan and lower the cost of your finance.
Be wary about borrowing to buy equipment, though – before taking the plunge, assess whether it’s essential to your business, and run projections to see if it really will pay its way. If the new equipment won’t increase your profits, it might be better to wait until you can afford to buy it without taking on debt.
3. To move or expand your premises
If your business depends on foot traffic, having the right location could mean the difference between success and failure. And if your business is thriving, a business loan could give you the funds you need to move to a bigger space or open a second location, so you can service your growing customer base.
Upgrading or relocating is a substantial investment, so think carefully and be sure there are solid business grounds for the move – other than just prestige or vanity. Consider how a new lease or mortgage, alongside a long-term finance agreement, could impact your profitability for years to come.
4. To invest in extra stock
Many small business owners decide to take out business loans so they can buy stock in bulk or bring in extra inventory for a busy period. You never want to run out of stock when your products are in demand and buying in bulk could net you some valuable discounts (especially if you can take advantage of special offers or closing sales).
If you’re certain you can sell the extra stock, then this strategy could increase your profit margins.
There are some pitfalls to watch out for – inventory management is crucial to your success with this strategy.Holding more inventory means extra storage and transport costs (as well as your financing costs), and if demand falls you could get stuck with obsolete stock.
5. Pursue a killer opportunity
You never know when the chance will come along to acquire a competing business or secure a major new customer. A business loan could give you the funds you need to make a strategic acquisition, to increase your capacity so you can service larger clients, or to expand your business into new markets or sales channels.
As long as the returns you can anticipate from the opportunity outweigh the cost of finance, borrowing could be a very shrewd business move. But it all comes down to the numbers – prepare realistic cost and revenue forecasts (including the cost of borrowing) to help you make an informed decision.
6. To build your credit history
If your plans for the future include major investment, taking out a business loan now could be a strategic move. It can be hard for a small business to qualify for a large loan – but borrowing a smaller amount when you don’t urgently need funds gives you the chance to prove that you can be consistent and reliable with your repayments.
This will also give you the opportunity to build a relationship with a bank or alternative lender, and to test their services before committing yourself to long-term borrowing.
There will of course be a cost to this strategy, but you could chalk this up as an investment in the future of your business.
According to the report from the Australian Banking Association only around 30% of small businesses have no debt. When deciding whether a small business loan is right for your business, make sure you take in to consideration all the fees and charges in to the cost of the loan. Do a cost analysis and ask yourself the question – will your business be stronger and better for taking out a loan?