Home Business Insights & Advice Four reasons businesses borrow money

Four reasons businesses borrow money

by Sponsored Content
10th Jul 20 10:29 am

It is quite common for business organisations to be in debt. What’s more, borrowing money to make more money is a widely adopted concept.

In the case of business, lending isn’t exactly a negative thing. In fact, there are plenty of positives from borrowing money according to Singapore licensed money lender Lending Bee. In essence, it’s about how you use it that matters. We discuss more below.

Types of small business loans

Bank Loan – Acquiring a loan from a bank is probably the easiest option for your business. However, this significantly depends on if you qualify for one [link on why you should not opt for a bank loan for your business]. While getting a loan from your bank is ideal since it offers a cheap form of long-term access to financial support, in most cases, they do require a certain amount of security on them or personal guarantees.

Peer-To-Peer Loan – This type of loan is offered by the unconventional lending sector where one borrows funds from investors who are seeking to gain some amount of return on their investment. Compared to bank loans, peer-to-peer lending can be arranged much faster, with more affordable rates (based on your credit history) and earlier repayment opportunities.

Government Start-Up Loan – Compared to other types of loans, this loan has government-backing and it is purposefully meant for start-up businesses. It offers low rates and up to a five years repayment period.

Asset-Backed Loan – This type of loan uses a business-owned asset as security. These assets can include land, machinery, vehicles, property, or stock inventory. In case your business owns considerable assets, then this type of loan is one of the simplest kinds of loans to take out.

Cash Advance Loan – This type of loan operates by exploiting future sales in exchange for immediate funding. Your business gets the financial support it needs with a certain percentage of the future sales being paid back directly to the lender. This type of loan is also referred to as merchant cash advance or business cash advance.

The following are four reasons why borrowing money for commercial enterprise isn’t just an aspect of the business landscape but mostly very beneficial.

1. Start-up costs need to be paid

Before any business can start operating, it requires some level of investment. This investment can include something as simple as a telephone, computer, and an internet connection. However, more is still needed. Your business needs premises to operate from, marketing for brand promotion, stock to supply, and most importantly enough capital to pay the staff. This applies also for slow traders.

Fortunately, there are many places to get this funding. You can take out a personal loan, or use credit cards as a form of flexible finance. You can also borrow from family members or friends. Learn more about ways to finance a start-up.

2. Working capital is required to keep the money flowing

Normally, you will need to pay your suppliers before customers pay their debts, and this tends to exert continual pressures on your cash flow. Hence, it is essential to have a certain amount of money accessible to your business at all times in order to keep the cycle moving and avoid running out of cash. This money is referred to as working capital.

As your business grows and increases sales you will be able to finance your working capital through profits. In case your business is experiencing fast and exponential growth, then the capital needed can constantly be ahead of the excess revenue gained from business activities.

3. Utilise the investment to generate more than it costs to borrow

This one of the top reasons why most businesses still use credit, even those that have been operating for years. Utilising the funds to make enough revenue will significantly help to cover the costs of borrowing.

When you take out credit, regardless of if it is invoice finance, a business loan, or an overdraft, you will be able to invest in more sales and generate more profit. Realizing success in business greatly involves spotting opportunities in the market and asking for the funds you need to seize the moment.

Rather than asking how much it will cost you to borrow money, you should be asking, what is the difference between what you can generate and how much it will cost to borrow?

4. Borrowing funds minimises personal risk

At times, you might not see the need to borrow money when you already have some money saved up in your personal bank account. However, you have to consider that there is a specific reason why you saved that money in the first place, be it school fees or retirement funds.

Regardless of your reasons, if you use that money to fund your business, then it won’t be present for the original reason, or in case of any arising personal emergencies.

However, when you take out credit for your business, you stand to gain a number of benefits and also increase the chances of your business succeeding.

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