Although there are a variety of motivations for a small company to take on debt, there are really only two areas in which credit can be useful: revenue flow and development. Either way, credit can do wonders for a company. However, a well-thought-out plan is necessary before taking on loans for any company venture. Taking on debt is highly risky for a business because any investment in a product could go bad. The advantages and disadvantages of using loans for financial flow versus using them as leverage for development are discussed.
Borrowing Money to Meet Financial Needs
There are times when fueling your company activities requires taking out SBA loans for financial flow reasons. Invoice discounting and merchant cash advances, for instance, can help if you have a high volume of accounts outstanding but urgently need cash to run your business. Pay off your short-term debt with your fast loan when you get paid.
However, no true yield on investment is made when a debt is used in this manner. It’s true that it may serve as a lifeline for your company during times of poor cash flow, and that’s a crucial lifeboat to have in order to remain alive, open for business, and make more money. Although it’s tempting to view loans like these simply as “the cost of doing business,” putting that money toward expanding your firm will yield greater profits in the long run.
Pros:
- Bridge the distance between making purchases and collecting payment to keep your company running smoothly in lean times.
- It can support your company’s finance plan in good times and bad.
Cons:
- May come at a high cost.
- It doesn’t multiply your money by using leverage.
Utilizing a Loan to Promote Expansion
It’s possible to make a lot of money by using debt for expansion. While cash flow funding is essential for keeping a company afloat, a debt put toward development opportunities can pay for itself and then some.
Here’s an illustration: To tide you over until your accounts outstanding are paid, let’s assume you resort to a short-term business loans choice. However, you must repay your loan with interest. This “investment” yields zero.
If you borrowed $10,000 and spent it on salespeople or goods, you might earn it back and more. If your new sales team is able to bring in an extra $5,000 in revenue, you will have made back half of your initial credit expenditure (less interest). You’ve made a 30% return on your borrowing money if the extra stock you bought brings in an extra $3,000. (again, less any interest charges).
Pros:
- Short-term cash-flow funding is typically more expensive.
- Have a chance of making money off of deposited lending money.
Cons:
- The company’s financial flow issues will not be resolved.
- Your money may not return enough.
The Ultimate Guide to Deciding on a Business Tactic
It’s a fact that some companies will require funding for both operating expenses and capital expenditures. The trick is to make the most of any interest you pay on borrowed funds.A cash flow loan may hurt your bottom line if your firm can meet its running costs between billing and payment. Similarly, taking out a conventional credit to fund unnecessary office tools or fast expansion can have a negative impact on your bottom line.
If you’re unsure what to do, a company loan expert who knows the finance method can help. They can tailor a plan to your specific needs, ensuring that you never run out of money and never miss out on the possibilities a credit can provide for your firm.
This content is not intended to serve as business, tax, or financial guidance. Consult a professional if you need assistance.
