5 Reasons Your Business Needs a Loan

Borrowing funds to meet your funding needs is never a bad idea, especially if you are an entrepreneur.. In fact, having finances available when you need them allows you to seize new business opportunities, pay your creditors on time, and keep reserves for unforeseen events. If you are still wondering what business loans can be used for or why companies borrow money, this article will address your questions.
 

Top 5 reasons to get a Business Loan

 

1. Business expansion 

   After spending some time on establishing your business, you may wish to expand its market reach and offerings. A business loan is the best option in this case. Let us understand how it can assist in your business expansion plans. 
    
   • If your existing office space is insufficient to accommodate your increasing workforce or to provide better services to your customers, you can use a business loan to invest in a new commercial space.
    
   • Customers' needs and demands are constantly evolving, for which you may need to expand your product line. This involves recruitment of a new workforce and increased investments in product marketing. A business loan can help with the funds required for these activities.
    

2. Inventory

   Inventory refers to products that are part of your stock. It includes raw materials, finished products, and goods in the manufacturing stage. The availability of inventory is critical to your company's operations. If you do not replenish your inventory on time, you might fail to meet your customers' demands. 
    
   Moreover, if you run a business where your product’s demand is seasonal, such as woollen clothing, you will need to stock even more inventory before the arrival of that particular season. 
    
   You can easily offset the inventory expenses by opting for a business loan. It helps you stay ahead of your consumers' demands without jeopardising your cash flow or emergency reserves.
    

3. Cash flow

   Maintaining positive cash flow is the biggest challenge that businesses confront. A business with negative cash flow might indicate several things, including over-investment, increasing overhead expenses, and client payment delays. The cash flow crisis appears to be even worse when you factor in the rent, staff salaries, and mortgage.
    
   In such situations, short-term business financing allows you to stay afloat even if your company is facing difficulty improving its cash inflows.
    
   Apart from business loans, some other options for increasing cash flow are listed as follows:
    
   • You may sell the obsolete machinery you had purchased for your business and use the proceeds to meet operational expenses. 
    
   • Instead of purchasing a new commercial space, you might want to consider leasing. It will assist you in reducing your business’ cash outflow.
    
   • You may switch to using more advanced technology for some of the business operations. This one-time investment will considerably reduce your operating costs. For example, you can save on staff salary, overhead expenses, etc. 
    

Also Read: Have you tried these 11 ways to improve cash flow in your business
 

1. Equipment purchase

   Plants and machinery are essential in your business, especially if you own a factory. If your entire production process is dependent on outdated machinery, it is better to replace it with advanced equipment instead of regularly paying for repairs and replacements.
    
   The price of heavy equipment can vary from Rs 10 lakhs to Rs 25 lakhs or even more and buying it using your company's revenue is not a good idea. A business loan would be the better option here.
    

2. Improving creditworthiness

   If you have spent some time in your business but are yet to avail of a loan, applying for a short-term business loan is a wise move. It is because the requirement of funds in a business is unpredictable. If you do not have a business credit history, your prospects of getting a larger loan in the future are limited to none.
    
   Opting for a small loan and repaying it on time builds your credit history. It not only qualifies you for a higher loan amount but also makes you eligible to secure an affordable business loan interest rate. 
    
   Of course, not a single entrepreneur wants to shoulder a debt when it is not required in a business. However, there are times when taking out a loan prepares you to deal with uncertainties that may arise in the future.

What are the three advantages of a business loan?

Taking out a business loan has various advantages. Below is a list of the top three advantages.
 

1. Flexibility 

   Business loans are flexible in every sense of usage. For example, you can use the funds to meet working capital requirements, launch new projects, hire staff, and other business expenses. As long as the funds are used for your business needs, the lending financial institution has no conditions on where you use them.
    
   There is also some leeway when it comes to choosing a repayment tenure. Short-term business loans are available for up to 36 months. Here, you have the option to select a term ranging from 12 to 36 months, depending on your needs and budget.
    

2. Unsecured loans

   Business loans come in a customised form. You will find various products suited to your specific business needs. The best part is that most loans available in this category are unsecured. You do not need to put any collateral to secure funds. 
    

3. Affordable interest rate

   The interest rate on a business loan depends upon your business credibility. The lender will grant you a loan at a lower rate if you run a profitable business with a low debt-to-revenue ratio and no previous loan defaults.
    

What do I need for a business loan?

 
Financial institutions do not have strict conditions for business loans. Still, you must note the following to make your loan application process go smoother:
 

• Keep track of your business credit history. If there is any loan default or skipped EMI on your credit report, settle them first.

 

• Make sure your debt-to-revenue percentage is below 50. It will help you obtain a low-interest loan.

 

• Get your financial records audited by a chartered accountant. Also, prepare a solid business plan before submitting your loan application.

 

• It is never a good idea to miss an income tax return (ITR) filing deadline. Your loan approval is heavily reliant on your tax returns.

 
Also Read: A Complete Guide to Collateral Free Business Loans
 

To Conclude

 
A business loan is crucial to improving your business’ bottom line and fulfil its needs for expansion. It is the ideal way to cover both long- and short-term expenses without putting your cash flow at stake. However, before applying for a business loan, assess your credit report and ensure that you are paying your taxes on time.