Popular belief often warns against starting a business with a loan, citing the sobering statistic that 30% of new ventures fail within the first 5 years. The apprehension and uncertainty that come with taking on debt can indeed be frightening, especially for small business owners. However, contrary to conventional wisdom, loans—especially lines of credit and especially business loans like that of the Philippines’ Maya Business—can be powerful tools for small- and medium-sized enterprises (SMEs) looking to bolster their growth. Forbes lists the best lines of credit options for small businesses as of May 2024.
When approached strategically, loans have the potential not only to sustain, but propel small businesses toward success. Here’s why you shouldn’t be scared of taking out a loan and why you should be bold about harnessing the potential benefits of this type of financing:
1. Business Loans Are Strategic Investments
There are right and wrong ways to use loans. One of the worst is to borrow money to fund depreciating or non-performing assets, while one of the best ways to utilize borrowed funds is to expand your business wisely. With a line of credit, you can capitalize on time-sensitive opportunities for your business and improve upon its overall revenue potential. Whether you’re planning on opening new branches, upgrading your equipment, or launching new products, a business loan may provide you with the necessary capital to seize momentum.
For example, a retail store owner may use a loan to open a second location in a high-traffic area, while a manufacturing company might invest in state-of-the-art machinery to improve production efficiency. Similarly, a service-based business could use a loan to hire specialized staff or implement a targeted marketing strategy to attract new clients.
Make it a point to be strategic about how you deploy your borrowed funds. Seeing a loan this way can help you accelerate your trajectory toward success and stay ahead of the competition.
2. Business Loans Help with Efficient Cash Flow Management
One of the most significant challenges for small businesses today is managing cash flow effectively. In some cases, clients may fall behind on payments, or suppliers may cause delays. Either can result in a backlog of orders and problems with the company’s immediate cash flow.
You’ll feel the difference that additional funding will make, especially when it comes to smooth and uninterrupted operations. The right business loan can do a lot to cover your day-to-day expenses, payroll, and unexpected costs. With access to additional capital, your business can confidently power through lean periods and position itself for long-term sustainability.
3. Business Loans Are Better Alternatives to Equity Investments
When a business needs additional funding, there are several options it can pursue, including seeking equity investment from a partner or an outside investor. The downside of equity funding is that it comes at the cost of relinquishing ownership and control of the business.
For instance, typically you must offer a percentage share of your company to an angel investor in exchange for the capital you need for your business. If your company achieves success, the percentage you relinquished may become exponentially more valuable in the future—and, in addition, quite expensive to buy back. You would also need to consult with your investor for every major business decision.
In contrast, business loans allow entrepreneurs to retain full autonomy and decision-making authority. If they choose debt financing over equity, small business owners can still preserve their vision and maintain ownership stakes in their companies.
4. Business Loans Provide Tax Benefits
One of the lesser-known benefits of business loans is their potential for tax deductions for small businesses on interest payments. Unlike equity financing, where returns are subject to capital gains taxes, interest paid on loans is typically tax deductible.
If you strategically time your interest payments on loans, you’ll be able to maximize tax deductions for your business. Consequently, your business will benefit from cost savings and improved financial health.
5. Business Loans Positively Impact Your Credit Standing
Responsible repayment of your business loans can also have a positive impact on your business’s credit standing. Timely payments will demonstrate your financial responsibility and reliability to lenders.
With improved creditworthiness, your company will be in a better position to negotiate additional funding if needed. For instance, you can negotiate for better interest rates and more flexible terms on future loans if you have a good credit score. A strong credit profile built on responsible repayment of your business loan will open doors to better financing options, so don’t be afraid to take one out in order to achieve your goals.
6. Business Loans From Reputable Institutions Allow Flexible Payment Terms
A lot of the fears experienced by business owners stem from the possibility of unexpected downturns in the business, which can lead to difficulties and delays in repaying loans. However, as long as you approach lending institutions with exemplary reputations, you’ll likely have room for negotiation.
Most lenders understand the unique challenges faced by small business owners and may be willing to work with an entrepreneur to structure loan arrangements that are manageable and sustainable. This flexibility ensures that loan repayments align with the cash flow dynamics of the business, minimizing financial strain.
Conclusion
As someone who leads their own small business, there’s evidence that you should be confident and optimistic about the opportunity to take out a loan for your company. The right loan program can serve as a catalyst for your growth and drive you towards greater innovation and business success.
