Is Expanding Businesses With Loans A Good Approach?
Most businesses stay afloat through long-term and short-term growth.
When your business isn't growing, it's losing business. A company is
unlikely to remain at the same level for years. The revenue from your small
business will cover those marketing expenses if you put some money into
getting new customers into your door. But for most small businesses,
organic growth comes from word-of-mouth. There are times when growth
opportunities knock on your door, but you may not have the cash flow to
invest heavily. Some business owners take out loans to finance their growth
opportunities.
Is this a good approach? Well, let's find out.
It depends on the stage of the project, what financing options you have
available, and most importantly, how quickly revenue will start to flow.
You can easily find bank loans (assuming your business is stable and
profitable), and one thing you have to do is pay interest. It does not include
shares, revenue percentages, or other company rights. Bank loans,
however, are almost always repaid right away. You may face problems if
your investment won't begin paying back immediately after receiving the
loan cash injection. A software company, for example, that wants to use the
loan to hire new salespeople or developers will need some time to get up to
speed and contribute revenue positively to the company.
Make your loan payments while this is happening. As another example,
suppose you run a delivery service and would like to take out a loan to acquire more trucks.
Those trucks will start contributing revenue to your bottom line as soon as
you deliver them, and you will be able to start repaying the loan with those
revenues.
The reason why so many startups turn to outside investors instead of
banks is because of this. Most angel investors and venture capitalists will
look at your business plan and give you some time to build up the business
so that they can see a financial return. You will be giving up some shares of
your company in return. The most important thing is you have a solid
business plan and a team that can convince a possible investor to invest in
your idea, even though you don't need to be profitable or have assets.
Borrow with Purpose and Be Strategic
It can be tempting to know that all of your financial problems would
disappear if you just had a little bit more money. Due to this temptation,
some business owners attempt to borrow money to solve their financial
problems. Debt in this situation frequently only serves to exacerbate your
cash flow issues.
If you're thinking about company loans, you want to be sure that you're
borrowing for the right reasons and that the debt will advance the business
rather than stifle it.
Different financing options, from short-term to long-term, from term loans to
lines of credit, are advantageous for other loan purposes. The more you
understand the types of loans that are best for your company's needs, the
less time you will waste applying for financing that will not benefit your
company.
Final Thoughts
While taking a loan isn't the answer to every small business problem, it's
possible that taking a business loan might be the right decision for your
business, as long as you take the right strategic approach. If you're honest
and clear about how you'll use the fund and your ability to pay it back,
borrowed capital could be the right growth tool for your business. For more
information, contact Fincrew today. Fincrew has different financing options
to help grow your business.
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