Taking out a loan has always been thought of as negative since it is equated with being in debt. Yet there are good reasons for applying for a loan. If a person or a company knows the difference between good and bad debt, then having loan can indeed be a positive step forward.
First things first, what makes a loan good or bad? Well, a bad loan is debt that is used for frivolous and unnecessary spending. A good loan, in the context of business, is the use of borrowed money to start or expand an enterprise. In short, a good loan builds the business while a bad loan is borrowing money for wasteful spending.
A business loan can be truly beneficial for the following reasons:
- Start-Up Fund for Your Business
Applying for a loan makes sense especially for new entrepreneurs or start-ups. Reality is, as they say, it takes money to make money. Putting up a business requires having a sufficient amount of start-up capital. Start-up capital is used to pay the government registration fees including the business permits, stocking up on inventory or supplies, setting up a store or office, buying or renting the office space or shop, and paying your employees’ salaries.
- Improve Your Cash Flow
For established businesses, taking out a loan is beneficial when the proceeds or funds are used to improve cash flow. Cash flow is defined as “the total amount of money that moves in and out of a business”.
For example, the amount of money that is invested for day-to-day operations is called operating cash flow. This includes the money used to buy and stock inventory, wages of employees, bills paid for business utilities, transportation costs, among others. When a business does not have enough money to sustain the daily operations, taking out a short-term loan may be one of the options available.
An even better example for improving cash flow is when a business owner uses a loan to purchase more stocks or items to be sold. In some cases, the borrowed money is used to buy more equipment and other materials which will then be considered part of the business capital outlay. At the surface, this is money being spent outside the business to purchase goods which in turn, will increase productivity and sales for the company. The improved productivity and sales, of course, will bring in positive cash flow back into the company. As a result, the business grows.
- Business Expansion & Maintenance
There are instances when an entrepreneur sees a new opportunity to enter into another line of business. Once he or she decides to expand into a new business line, more money is needed to serve as capital. Taking out a business loan is a viable alternative when the potential for financial success outweighs the risk of borrowing money.
Established businesses also resort to loans when much-needed maintenance is needed. This is very common in businesses involved in manufacturing and food services. Manufacturing businesses usually use a number of machines that need to be repaired or replaced. Food service companies like restaurants, on the other hand, periodically need to replenish stocks or renovate their shops in order to remain competitive. When the daily incomes or net earnings of the company are insufficient to fund the maintenance needs or planned business expansion, a business loan is a reasonable option to consider.
Emergencies do happen to businesses. Whether it is fire, severe flooding, earthquake, and other natural or man-made disasters — these unfortunate events cause damage to the business and to the people who run it. A business loan will be a lifeline to sustain or revive a business that has been struck by an emergency.
- Hiring New People
A business loan is also a useful tool in helping a company pole vault to success. Such pole vaulting often involves hiring good talent, which takes money. Whether one hires for top management, supervisory, or rank-and-file positions, the hiring process inevitably takes a certain amount of funding from publishing the job vacancies to making actual job offers to applicants. Of course, once new people are hired, it creates a new line of expense in terms of additional payroll. When a company or business leader sees that the benefits of hiring new people to run the firm outweighs the costs of repaying a business loan, borrowing money becomes logical and necessary.
While no one wants to be in debt, there are strategic uses and proven benefits to taking out a business loan. With a clear purpose and a right strategy, a business loan can make a business reach higher heights of productivity and profitability.
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