To start and run a business requires mobilization of various factors of production namely capital, labour, space (land) and technology. The magnitude of each depends on the scale of operations. Taking action on a business venture requires funding. It’s always advisable to start ‘small’ or at a reasonable scale and grow as you learn the ropes of running the business.
A business can be funded using the owner’s resource, borrowing or combination of both. Owners funds are also referred to as equity and borrowing is also called debt capital. There many forms of debt capital. A borrower’s taste or choice depends on many factors which include the terms and conditions of the loan.
A business loan makes sense if it enables the enterprise to generate sufficient positive cash flows to service the loan instalments and leave some surplus. Borrowing should always be demand-driven, that is business needs should trigger the need for external funding
Why take a business loan?
- Day to day operational expenses
Normally individuals and companies borrow to fill some existing financing gaps in pursuit of certain goals. Borrowers create demand for credit, lenders are in the business of supplying finances to satisfy borrower’s needs.
Working capital loans allow the business to meet its day to day operations especially for seasonal businesses that are short term. It also cushions the business from any uncertainty.
- Bridge for delayed payments
Majority of business owners operate by giving short term credit to their customers, in this regard, a business loan is a game changer while maintaining a healthy business relationship.
3. Business opportunities
Working capital loans come in handy to support emerging business opportunities. These can be occasioned by upcoming events especially during festive seasons or vendor discounts on products and services
4.Business Expansion
Every business owner’s dream is to expand their business venture, and this comes with costs, from space acquisition, legal requirement, staffing among others. Business funding would be critical to realize and achieve these dreams
5. Acquisition of business assets
Most businesses source funding to acquire business assets which include machinery and other business equipment. Through funding, the business remains financially stable without affecting its core capital.
6. Business Investments
A business owner would consider taking up a loan for investments such as buying properties without affecting the business cash flows, the properties can be used as collateral to acquire loans in the future. During a recession, business owners can take a business loan to invest while the stock market prices are favourable.
7. Hire new /qualified employees
Most business owners have operated their businesses single-handedly. As the venture continues to grow and expand there is need to hire professionals. This helps in tapping in ideas for innovation improve the product line. It also ensures the smooth running of the business in the absence of the business owner
While there are many reasons to seek business capital in the form of a small to medium business loan, the above-mentioned are some of the most common. In general, unexpected payments, cash flow challenges or debt consolidation are all common drivers. On the other hand, opportunities such as growth, expansion and development are about making smart, well-calculated investments that will result in greater returns in the short, medium and long-run.
Article by: Monica Gachucha (Branch Manager- Town CBD)- Springboard Capital Ltd.
