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Four Reasons Why Business Loans Are Important

Business loans can mean the difference between success and failure. Not just for you, but for those around you as well.

Every business has a different growth strategy, but they could all use more capital. 

When a business needs money, there are several avenues to get it. Investing profits back into the business is one. It’s rare that cash flow is healthy enough for reinvestment, though. 

Another way is to find investors willing to make a capital injection. This works for a lot of businesses, but it has several drawbacks. For one, investors expect more than just a loan repayment. Often this means giving them a part of the business.

The third option is applying for a business loan. This type of debt finance often makes a lot of sense. A lenders’ motivation is to lend money and they will try to make it desirable to borrow. You can accrue debt without losing control of any business operations

In short, loans are an important way to start or continue to build your business. They’re also important for the business community at large for several reasons.

Reason #1 – Loans Normalise Economic Cycles

Periods of economic growth are always followed by periods of decline. Small business owners, in particular, are vulnerable during these declines. A working capital loan can get a small business through a rough time.

Even if a business is doing well, it’s not immune. A good long term business strategy should take slow periods into account.  Savings and smart investments can only do so much. A future-proof business plan should include some amount of debt.

Sometimes business expansion plans align with economic downturns. In those cases, it’s often a good idea to borrow money. Lenders will be just as affected and will try to make borrowing money easier. It’s a good time to avoid higher interest rates.

The worst-case scenario is bankruptcy. But less-drastic negative outcomes are also damaging. New businesses, in particular, need to maintain momentum to survive. If an economic downturn slows them down enough, they may never recover. A small business loan can provide stability to keep the pace until markets recover. 

Reason #2 – Loans Launch Businesses

Every new business needs starting capital. 

Businesses start out as ideas, and only ideas that get funded become realised. This is the most common use for business loans. And there are many advantages to using debt in this way. 

Many times, it’s the only way to get ahead with a startup. Especially when facing a rough credit score. A couple from Sydney learned this the hard way. 

Dave and Janet decided to start their own business making custom instrument cases. They had 

been working in the field for a while and saw the need for customisation.

From the beginning, they had to make difficult choices. They couldn’t invest in marketing and 

inventory so they decided to cut marketing. Their initial funding soon dried up as orders dwindled.

They decided to apply for a loan, but their credit history wasn’t great. After several rejections, 

they secured a small business loan. Now they’re struggling to keep up with demand.

As mentioned earlier, equity investments are another way to start a business. But most people start out with a coherent vision for their business. Investments can significantly compromise that vision. 

Business loans can also be a good way to manage tax burdens. The interest accrued on business loans is tax-deductible. Also, interest on personal loans could be tax-deductible. That is if the interest accrued was for income-producing purposes. 

If you take out a personal loan for a business, the interest on it is tax-deductible. 

Reason #3 – Loans Let You Capitalise on Opportunities

Deciding to expand your business slowly and minimise debt can be a sound economic plan. But it could mean missing out on significant financial opportunities. The amount of money you have shouldn’t dictate the amount you can potentially earn. You should be able to take advantage of opportunities when they arise.

For example, you might secure a contract for a job that needs more people than you currently employ. Maybe a competitor shuts down and you gain a large amount of their business. Or there might be a limited-time sale to buy inventory in bulk. There are countless scenarios where you need to act fast or lose your chance. 

Success comes at a price and every situation is different. The potential gains could easily justify the costs of added debt. 

Reason #4 – Loans Are a Part of a Healthy Economy

Business loans make a big difference in keeping your finances healthy. Not only that, they also help maintain a prosperous business community. The volatility of markets and industries can make reliable economic projections difficult.

Not every business needs loans all the time, but most do at some point. Even if you don’t need a loan now, you probably want a favourable environment for when you do. Interest rates and other loan terms respond to economic dynamics. So keeping the financials healthy should be a long-term goal for any business owner. 

After all, lenders are businesses too. And a large number of people depend on them. 

If loans are accessible, more businesses get a chance to enter the market. More business activity means more jobs, which in turn means more spending. The entire community benefits when capital is available. 

It’s Time to Rethink Business Loans

As you can see, business loans are a useful financial tool. 

Starting a business is always challenging. But a loan can help solve the most difficult problems. Don’t make the mistake of thinking that you have to borrow a large amount of money to make it worthwhile. Small loans are just as important.

Loans are also a great defence against economic stagnation. They’re also key for economic growth on the whole. A well-timed strategic capital injection can help a business maintain momentum.

Many people make the mistake of believing that all loans require collateral. This isn’t the case. You may qualify for a loan without it. 

We offer business loans, alongside several other types of loan, at Unsecured Finance. Head to our website to find out more about what we have to offer. And if you’re ready to apply, use our online form to lodge your application in less than five minutes.

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