Business loans are more commonplace than you think. Contrary to personal finance, taking out strategic business loans is even advised by business experts, financial advisers, and even by your Brisbane bookkeeper. But just like personal financial management, excessive and careless borrowing money has repercussions.
Advantages of Taking out Business Loans
- Needed funds are readily available – Unless you have the cash intended for the purpose, borrowing is the quickest way to raise money needed for your business. No need to forego of opportunities or wait for next cycle’s cash inflow or until you have enough saved.
- Reasonable interest rates – Compared to personal loans, banks offer business loans at a generally lower rates and easier terms of payment. You can also negotiate the rate with the banks, especially if you already have an established business.
- Flexible repayment terms – Longer terms mean lower monthly repayments and higher cash inflow. Shorter terms mean lower interest expense. Consult with your Brisbane bookkeeper to help decide on the best loan term depending on what is more important to your business financial needs.
- Alleviate funding needs – Do you need money to purchase an expensive equipment, repay an expensive loan, or fund the production of a huge order? A business loan can help you out of your immediate financing needs.
- Tax cuts – Interest costs are expenses that can offset taxes. In the tax computation, the expense is deducted from the income, which results in lower tax payable.
- Cost is limited – Another way of funding a business is by acquiring a partner or selling shares of stocks. Although capitalising financial inputs will not cost the company in terms of interest expense, it will result to continuous payment or sharing of the profits.
Disadvantages of Funding a Business by Borrowing
- It will cost the company – Use of money does not come free. An interest rate and expense come with business loans. The rate will depend on the amount you’re going to borrow, the terms of payment, and your credit rating. Lenders might also charge processing, documentary, and other fees.
- You might struggle to keep up with payments – There is always the risk of you not being able to keep up with the payments. Missed payments mean additional interest expenses and the loan being called on demand. Sales can go down, the expected return might not materialise, and market situation turns for the worse. A lot of factors can affect your ability to pay.
- Rates are liable to change – There are two main classifications of interest rates; fixed rates and flexible rates. Fixed rates are usually higher, but are fixed throughout the term of your loan. Flexible rates are lower, but they can go lower or higher, depending on a lot of things, including the economic situation of the country.
- Documentation requirements – Banks and other financial entities will require you to submit financial reports and other business documentation. This is to confirm the legality of your enterprise and its earning capability.
Critical Factors when taking out a Business Loan
- The purpose of the loan – Business loans should be limited to spending that are expected to generate income or reduce expenses. Examples are buying a machine equipment that will double the production or to fund the outfitting of the second store.
- Amount needed – Determine the amount you need. Borrowing too much will result to paying interest for money not used. But also make sure that you have enough for the project, as incomplete funding could lead to a futile endeavour.
- How much can you afford as monthly repayment? – This is a major consideration for business planners. The amount you can pay each month will dictate the length of the loan terms and the total interest expense incurred. This will also affect your cash flow. An experienced Brisbane bookkeeper can help you map out your financial forecast and planning.
- Is the loan secured? What is the security? – Lenders might need security for the loan in the form of a collateral. This is usually a real estate property. Be prudent when putting assets as security of business loans.
- Terms and penalties – What are the terms of the loan and the penalties thereof? Make sure to read the fine print, or better yet, have a legal advisor read and explain it to you. Do not sign the agreement unless you understand all the terms, implications, and penalties stated.
So is it wise to take out a loan for your small business? If the expected return of the investment is higher than the interest expense, yes. If you can afford, or believe you can afford to pay for it, yes. If the risk of losing the collateral is very low, yes. Otherwise, it is better for your business to defer the expense or find other ways of funding. Your Brisbane bookkeeper will gladly help you better understand the implications, benefits, and drawbacks of taking business loans.