A common misconception that many people have regarding taking on a loan is that the borrower is going through some financial difficulties and having cash flow problems. People usually associate borrowing with a negative connotation, and view the notion of taking on a loan as a bad thing, and only people who are desperate will need a loan.
While there may be some truth to this, it is not necessarily true for all businesses that take on a business loan. In fact, many big and established businesses such as Google and Apple have taken on billions of dollars of business loans just to fund their growth. But does that mean they are in financial difficulties? Or are they making a loss? Even in a difficult time like this Covid-19 pandemic, where major economies are slowing down, these tech giants are still making profits despite a global recession.
Cash is King
Having enough cash can make or break a company. Inevitably, when it comes to running a business, it is all about costs. Any plans that we want to implement for our business will cost us money - There are costs involved in many aspects of running a business, such as hiring people, marketing costs, or even to purchase machinery and equipment. We often need to spend first before we start seeing the returns roll in.
Maintaining a steady cash flow keeps the business running. Whether you are looking to pay for short term monthly expenses or planning for long term marketing strategies, having a positive cash flow can bring your business to greater heights and increase profitability. Most importantly, having sufficient cash allows businesses to capitalize on growth opportunities.
The most common way to attain more cash for your business is by taking on a business loan from financial institutions. It is also a cheaper way to get financing (as long as your company qualifies for a business loan) as compared to raising equity. After getting the desired amount of loan to fund your business, what is important next is how you utilize the money. Let us look at how a business loan helps in growing your business.
- Cash flow management and liquidity
Cash flow management has always been one of the top problems that businesses face. There are monthly business expenses incurred that cannot be avoided. This includes your employees’ salaries, rental, utilities, day to day operations and other fixed costs.
Cash flow issues are not only faced by new startups. Even if you have been in the business for many years, you could still find your revenue drying up unexpectedly due to foreseen circumstances or changes in economic climate. As seen over the past few months, due to the unfortunate Covid-19 pandemic, many businesses are struggling to survive mainly due to the lack of cash flow. Ensuring liquidity during this period is utmost important.
A business loan helps by giving your business that push needed to keep your business afloat. It may not be an issue with your business model, but simply due to an economic downturn that affects the majority of businesses. By maintaining a healthy cash flow during this period with a business loan, you are able to focus on other areas, such as pivoting your business model for the time being, going digital with your business, or even sending your employees for reskilling and upskilling during this lull period.
The last thing you want is to shut down your operations because you don’t have the cash on hand to pay for the monthly expenses. Closer to home, we have seen restaurant chain Dian Xiao Er seeking a S$5 million business loan under the Temporary Bridging Loan Programme to pay for operating expenses, as well as for long term contingency plans in case they need more funds to counter the effects of Covid-19 economy in the next 18 to 24 months.
- Business expansion
A successful entrepreneur never stops exploring and growing. We don’t just start a business to earn enough and be content. We want to do something different and grow a successful business. Making the decision to expand your business is not just about finding the right fit and timing, but having the resources, that is the capital, plays a big part too.
By relying on existing business funds to finance a business expansion may not be sufficient. First and foremost, have a good business plan drawn out to ensure that the business expansion or new investment is profitable and able to cover your loan interests. Being able to attain a business loan will then help to accelerate your business expansion and growth.
You want to have the funds readily available to capitalize on such growth opportunities, and not spend the time going around to look for investors to back your expansion plans. You also don’t want to wait till your profits increase to the point where you have excess cash to start expanding your business. This delay might cause you to lose out on the chance for the business expansion, and more often than not, such opportunity costs can be higher than the cost of the business loan itself. Having cash gives you a chance to be aggressive in expanding your business while providing some room for calculated risks.
- Leveraging on opportunities
Leveraging on a business loan to take advantage of opportunities that are likely to generate higher returns than the cost of borrowing makes business sense.
Entrepreneurs are generally not limited by their ideas, instead, they are restrained by the resources they have to implement their plans. Without having sufficient cash, it would be hard to execute any ideas, regardless how profitable the opportunities may seem to be.
Covid-19 has brought along with it many challenges, yet at the same time, new opportunities have arisen, especially for businesses seeking to go digital or retail shops turning to e-commerce. Nevertheless, the lack in cash is often the hindering factor for companies to move on to the next step and to take advantage of such opportunities.
A business loan, when used in a correct way, helps to grow your business, while enabling you to maintain a healthy cash flow for the necessary expenses. Needless to say, it still depends to a large extent on your business model. If your business model is not sustainable in the long term, a business loan will not be of much help. However, if you have a sustainable business model that is profitable thus far, a business loan would come in handy to help grow your business to the next level.
Not sure what you need to look out for when applying for a business loan? Read here for more information on the Temporary Bridging Loan Programme, and our SME Business Loan Guide 2020.
Read also: What Happens When You Default On a Business Loan?
Read also: Factors to Consider When Applying For a SME Business Loan
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