5 Reasons Why Taking a Business Loan is Not Really a Bad Idea
by CashOctopus • September 4, 2019
Taking a business loan in Singapore should never be seen as a sign of weakness in a company. This type of loan is also not limited to small and medium sized enterprises, and many large companies still take business loans to finance various sectors of their operations. The following are some good reasons why you should consider taking a business loan.
1. For growth and expansion
Your business could have reached a level where it is time to go to the next level in terms of clientele base and area of influence. In view of this, you may need to acquire extra space to satisfy the growing demand for your product. As part of your expansion, you may also need to hire additional employees and perhaps set up an office in a different location. All of this will require funds which may not be immediately available. A business loan will come in handy to facilitate the expansion.
2. To finance working capital
Doing business has its ups and downs and there could be times when a big client could delay your payment for one reason or the other. This will definitely have the ripple effect of creating a cash crunch in the business. While you wait for your cashflow to normalise, you could take a business loan to facilitate the payment of normal business expenses such as rent and salaries. This will help your business to remain afloat as you follow up on your debtors to release your funds.
3. To purchase inventory
Purchase of inventory is usually a major expense for most businesses. You could experience an unexpected emergency in your business that requires extra funds and this may cause a depletion of your cash reserves. As a result, you may not have enough funds to purchase the necessary inventory needed to continue operating. Taking a business loan will help you to purchase your business inventory so as to continue supplying to your customers.
4. To build a good credit rating
You may have a plan to take a big loan at a future date. In view of this, it will be wise for you to start building your credit rating by taking a smaller loan first. As you take this first loan, you will also be building a good working relationship with the lending institution so that you are able to apply for a larger amount later on. Ensure that you pay all your instalments on time so that you get a good credit score.
5. To take advantage of unique opportunities
You could be offered a rare opportunity to generate double profits. For example, your supplier could give you a special rate of half price for a large amount of inventory, or you could receive an unusually large order from one of your clients. The business loan could help you to take up such opportunities. However, you also need to ensure that the profits gained from the opportunity will cover the costs of the loan sufficiently so that you do not end up in a deficit.
Once you have decided to take up a business loan, it is important that you use the tips below:
Find out the eligibility requirements.
Before you apply for the loan, ensure that you know all the eligibility requirements as well as documents needed. This will prevent your application from being declined. If you do not have all the documents needed, make arrangements to get them before you put in your application.
Determine exactly how much you need.
Before you apply for the loan, go through your budget and work out exactly how much you need to borrow. If you apply for less than is needed, the loan may not yield the expected returns and you may still be in need even after borrowing. However, if you apply for excess funds, then you could end up with a debt that you cannot pay. Go through your financial plan and work out the actual amount that is needed for a maximum return.
Determine whether you can repay the loan comfortably.
Go through your latest cashflows and work out whether you are able to repay the loan comfortably. Ideally, your monthly income should be at least three times the amount needed for the loan repayments. Most licensed money lenders will ask for your recent bank statements to determine your ability to repay the loan.
Check your credit score.
Many lenders will check your credit score before approving the loan. It is important that you confirm your credit rating before submitting your application. If you discover that it is not favourable, make every effort to pay off other pending debts so as to improve the rating.
In conclusion, taking up a business loan has many advantages and you should not be afraid of putting in your application. The key is to have a strict budget policy, as well as to ensure that the money borrowed generates enough profits to service the repayment of the loan.