Is a Business Loan a Good Idea?

A business loan? You might think that you don’t need it because many people seem to be against the notion of taking out one. We don’t blame you because of the reputation many business loans have. However, if you’re reading this today, you’re probably worrying about your business’ finances and are looking into this option.

In this fast-paced world, fortunes can quickly change. One moment, you’re enjoying your business’ profitability; the next, you’re worrying about its cash flow. What do you do when your business’ finances are in jeopardy?

You can resort to a loan. But is it a good idea?

What is a Business Loan?

A business loan is a contract between an entrepreneur and a lender or a bank that entails borrowing a certain amount of money and repaying it through installments over a few months or years. It works similarly to a personal loan, except business loans are meant for entrepreneurs and their businesses.

Business loans are usually used for capital, cash flow support, purchase, etc. That said, there are different types of business funding like invoice finance, cash advance, merchant cash advance, etc.

These loans are usually meant to fund different aspects of your business or simply be financial support for the business itself. But before you take out a loan, you should check its APR first to ensure you can pay it. If you don’t know what is APR, it’s essentially the annual cost of the loan, which includes origination fees, interest rates, discount points, etc.

Expansion

Expansion can be in any shape or form. Usually, a big company would like to expand by opening up a new branch in a different area or even a new country. For other companies, renting out a new office space for a new location is their way of expanding their business. In some cases, businesses expand by creating a new product or service.

These methods of expanding may be different, but one aspect of them stays the same, and it’s that expansion costs money. That said, before you take out a business loan to expand your business, you need to run the numbers first and see if your business can repay the loan. But in conclusion, one of the best ways to fund your business expansion is through a business loan.

Emergency Fund

Emergency funds aren’t only for personal use. A business can also have them; having one is a good idea. Often, an emergency fund lies between the company’s survival and bankruptcy. That said, if your business has a lean-off or drops off suddenly, you can tap into your emergency fund to keep your business afloat until your business picks up again.

One example of this is back during the pandemic of 2020. Due to COVID-19, many businesses have closed down, and those allowed to stay open struggled financially because their customer base has diminished significantly. Those that remained to this day had some significant financial cushion to stay afloat.

Liquidity to Pay Regular Expenditures

As a business, there will always be monthly bills that you have to meet, like utilities, loans, rentals, etc. Not to mention this also includes your employees.

Some people might think that this is only a problem faced by startups. But they would be surprised to learn that a lot of businesses, even the ones that have been in the industry for a long time, can still have times when business is dry with little to no cash flow.

This is especially true for businesses that provide services. They often face issues regarding receivables, which sometimes can take months to come in. The last thing you want is to be a hostage to your clients, so taking out a business loan is a smart way to not rely too much on those receivables.

Tax Benefits

Long story short, the money you’ll be paying for the interest of the business loan is tax deductible. Before taking out a loan, you must check the interest rate limits eligibility to ensure. Also, keeping a record of all your interest payments is a good idea, just in case the IRS doesn’t grant anything for your interest payments.

Business Credit Improvement

Keeping your business credit in good shape is usually a good decision if you have a new business.

Good business credit offers many advantages, like making loans much more accessible and being more trustworthy for investors and partners alike. However, if your business is new and is still building its business credit, taking out a loan is an excellent way to build it. This is because your monthly payment has a huge role in calculating your business credit.

Final Words

A business loan is only as good as the business borrowing it. That said, before you take out a loan, you must ensure you can repay it in due time. If you fail to do so, your business will take a huge hit. But if you’re responsible enough, a business loan is a huge asset with multiple advantages for your business.