It is largely believed that one should spend within their means and that taking a loan is a bad idea. However, the decision to opt for a loan is specific to situations like one to purchase a house, which is a wiser decision than taking a loan to purchase a high-end gaming device.
Similarly, when it comes to running a business, there are situations where opting for a loan could be a better option than to use one's savings. Here are 5 situations among many where a business loan is wise to opt for:
1. Improve capacity
One of the best ways to raise revenue is to increase supply and thereby improve one's presence in the market. Once the business is set up, reinvesting earnings will not be sufficient to grow.
A business loan can help you buy extra machinery or rent a new storage house to help create the inventory needed for a sudden large order that may come up.
At the growth stage of the business, when revenue catches up and you realize the true potential your product holds in the market, there is a need to expand. Whether it is opening a new branch or adding a new segment to your existing product range, these major changes require a larger sum that profits cannot suffice. A business loan could help with the liquidity needed at that point in time and capture the opportunity to multiply profits.
Funds are also required to increase the Human Resource capacity, another important asset to any enterprise. Whether it is an employee with a specialized skill set to oversee the expansion of the business or to help with an increased need for labour, the hiring process requires expenses you need to be prepared for. Hiring new employees will help increase capacity and the expense will pay off sooner or later.
3. Emergency cash
When run on credit, some order payments take time and this could disrupt the cash flow you need to fulfill pending orders. You will also have expenses like making payments to your raw material supplier and pay off your employees' salaries. These requirements are urgent as non-payment to a supplier, employee or failure to fulfill an order could hurt the business' reputation which took a long time to build.
4. Improve credit score
If one is starting off as a new business, bigger loans are hard to fetch due to lack of credit history and a higher risk of lending to an unestablished business.
Getting small loans and making installment payments on time can help the business build a good credit profile. One could even start with opening an overdraft account. Eventually, the bank will have historic loan data to trust the business with a bigger loan.
5. To pay taxes
Tax returns by businesses need to be filed on a monthly and quarterly basis. There are chances of a miscalculation or a change in tax regulations that could lead to a sudden need for cash to pay off the taxes so as to not get under the Tax Department's radar and also avoid penalties.
A business loan can help you clear any tax dues at the time of a shortfall in cash.