Small businesses borrow money for various reasons. While it’s not always the answer to every problem a business owner faces, it makes perfect sense in certain cases. If you’re thinking of borrowing capital, you should consider the costs associated with it and see if your business can gain more than it loses. Ask yourself these three questions:
- Are there operational concerns that need to be taken care of right away to keep my business afloat?
- Will borrowing provide improved profitability and return-on-investment?
- Will borrowing help me increase the value of my business?
Additional capital can jumpstart the growth of any business and keep it moving forward. There are many ways borrowing can be beneficial to your small business. While it comes in hand for struggling entrepreneurs, this tool can also be used as a leverage to create better opportunities for businesses.
Borrowing is extremely common and also a normal part of running a business, especially if you have a stable cash flow and the revenues to support debt. In this article, we are going to answer these questions and help you determine if leveraging a loan makes sense for your business.
Keep Operations Running
Businesses have critical parts to keep themselves running. Sometimes the unforeseen happens – like a machine that needs repair or replacement. It may not be wise to wait for cash flow to be available to pay for the failed equipment. These types of expenses, whether anticipated or unforeseen, could be good reasons to take out a cash flow loan. Here are some examples:
- HVAC, Plumbing, Or Other Utility Problems
A failed plumbing line could cause so much trouble for your business. Most of the time, this work requires a contractor to dig up the lot to make repairs. It can be a huge expense and enough reason to borrow or access a credit line.
- A Piece Of Equipment Critical To Business Operations
This could be a milling machine in a small manufacturer or an over to a pizza restaurant. A quick cash loan can help you fix or replace a critical equipment right away. You might have to deal with the costs of borrowing, but it might be better than dealing with the loss of not being able to meet customer demand.
Any tool that can increase your business’s profitability shouldn’t be ignored. Many small businesses have found success after leveraging debt to fuel growth by increasing return on investment. Thriving businesses look at borrowing differently compared to those who seem to struggle with debt.
They consider the total costs of borrowing (fees, interest rates, etc.) as part of the costs of goods sold. You can use this strategy to see if the costs of taking out a loan will make your service or product more profitable. Here are examples of when small business borrowing could increase profits:
- A new marketing campaign
Marketing helps businesses reach more potential customers. At some point, you might want to advertise your business whether it’s a direct mail campaign or a series of internet ads. Essentially, the more people you reach, the more profits you can generate.
- Purchasing an equipment
Consider any equipment that can increase your revenue. If you’re a restaurant owner, the addition of a new pizza oven could generate more sales. If you’re receiving more orders on certain products, additional machinery could help produce more supplies and meet the demand.
- An opportunity to buy quick-turnaround inventory at a lower cost
It’s a common practice among suppliers to offer discounts on bulk purchases of inventory. If these supplies make a quick turn around for your business, then it saves you some money and even increases your profit.
Add Business Value
Borrowed capital can finance long-term investments that add value to your small business. These are a little different than improving the return on investment of an initiative or product. A couple of examples of borrowing with this objective in mind include:
- Acquisition of warehouse or office space
You might have a restaurant with a goal to add an outdoor dining area or a warehouse that needs more space for new inventory. These types of investments provide a competitive advantage, and a small business borrowing could help without having to sacrifice much of your cash flow.
- An update to the business’s physical facilities
If you’ve been in the business for a while now, your building exterior and machinery might need some touch-up. Revamping your office space and updating HVAC needs are investments that add value to the business. Furthermore, they are good reasons to consider borrowing.
- Expansion to a new location
Growth is crucial to the long-term viability of the business. If branching out to a new location will help serve your customers better, then taking out a loan for this venture is a perfectly good reason. Use this opportunity to improve your position in the market and seek small business financing if you can cover the additional debt.
Small business borrowing or additional capital is not the solution to every challenge that a business owner faces. However, in the right circumstances, it can be a great tool to help your venture grow and thrive. Evaluate your company’s financial standing and create a forecast on your expenses and revenues. You must be responsible and consider the costs associated with taking out a loan, regardless of how low the interest rate might be.
There are cases when you have to borrow to keep your business afloat, but ultimately, borrowing should help with profitability. It should add value to your company and provide an increased return on investment.
Trust reputable lenders like Biltmore Loan. As a trusted business in Arizona, Biltmore Loan can provide immediate cash to supplement your cash-flow or take your project to the next level. Provide any high-value asset to grain a collateral loan. For more information on how their business loans work, call 480-705-5626 for Chandler clients or 480-991-5626 if you’re coming from Scottsdale.