Money or Capital plays an important role in the proper functioning of a business. It is a requirement for even the smallest elements of a business as well as the large ones. For the business to sustain itself and compete with its rivals in the market capital is required. It can be easily said that more the capital, more are the chances to get an edge over your rivals and no matter the type of business or the size of business, everyone requires financing. When an entrepreneur starts a business, the biggest factor for them is the funding, as to who would fund their ideas, and help them bring the same to the market.
Once there is sufficient funding and the business starts to run efficiently, it starts to bring in revenue to meet the break even point and once the break-even point is achieved it would imply that the business generates enough profits to repay the investments and at the same time the owner can reinvest In the business itself. But, reaching to reach the break even point for a business, the plan and roadmap needs to be solid and usually there are a lot of investments involved before the business becomes self- sufficient, These investments are generally from an external source who are convinced of the business plan and its ability to generate profits, and are usually in the form a business loan from a bank that helps ensure that the operations of the business run smoothly without many interruptions.
A business loan acts like the supporting role in a movie, plays alongside the side-lines, but their role is so important that the movie can get meaningless without them playing their role. The business loan helps a business overcome the financial constraints while trying tor reach maximum efficiency and thus get the maximum out of the potential which the owner and the investors expect by deducing the business plan. Some of the reasons for getting a business loan could be:
- Asset purchase– The business might need to purchase land, build an office or even rent an office for its operations, there might be the requirement of an expensive piece of machinery or a site for building the factory. These things require a lot of money, as they form the foundation of the business and banks provide business loans to purchase all these stuffs once they are convinced that the business can provide them with returns. The amount of money involved in these investments is not small, so the banks need to ensure or double check everything before loaning out the money, thus it takes time to get such business loans.
- Short- term working capital– This is the type of business loan that is used so as to ensure that the daily operations of the business run smoothly and efficiently. The money from this loan is generally used to provide salaries to the employees, or for the purchase of raw materials in order to make the product or maybe to ensure that there are enough office supplies at all times for the employees, etc. The loan amount is not a very big and the repayment time is not that big either, these act as small capital injections in the business to ensure that there is enough cash flowing through the business and there are no shortages or monetary problems within the business itself that could potentially be a big trouble to the business.
- To purchase inventory- A business may not do well at all times, there are ups and downs, but the important thing is that a business should realise its potential. Even during the downs and during peak revenue seasons like festive seasons in most cases, the business must be prepared to tap its potential to the maximum and run effectively without hiccups as there might a time when suddenly the business starts doing well and orders start piling up and it is important that a business is prepared for that so the system doesn’t break down at times like these when it can generate the maximum profits. To tackle such times, it is important that a business keeps stock in hand and for that they can take a business loan so as prepare themselves in terms of the inventory toa void any shortage.
- Business expansion- When a business is doing well and is ready to expand its units so as to cover more sectors in the market, it needs fund to establish new units and that requires capital. Ideally, business looks to expand, after it has reached it break even point and it generates enough profits so as to invest in the expansion, but the amount for expansion is quite big, and directing all profits to the expansion project is very unlikely as it might affect the already established and steady cash flow of the company, so business loans come to the rescue. The business invests some money from its profits and the remaining from a business loan to utilize the finances in the best way.
Benefits of a business loan
A business loan can benefit both, an entrepreneur looking to get funds for a startup as well as an already established business, as it is rightfully said that “Cash is King”. Everyone requires funds and the proper utilization of the funds is what makes a business successful. Choosing the right business loan is the first step towards managing finances efficiently. There are several lenders in the market as well, not only banks but also several NBFCs (Non- Banking Financial Company) also provide business loans of varying amounts and varying interest rates, there are government schemes to provide business loans as well especially for the businesses that fall under the MSME (Micro, Small and Medium Enterprises) sector.
Doing the research and getting the best suited deal for their business is the task of the owner and this is where the owner faces the hardships in making the correct decisions. While there are immense benefits of taking a business provided that the repayments are managed well, some which can be listed are as follows:
- Easy, Convenient and Flexibility in Usage:
A business loan is quite easy to get in case of a well-established company looking to expand their business provided they fulfil the minimum turnover requirement set by the lender and provided some other criteria that are also set by the money lending organization has set is met. For a new entrepreneur, getting a business loan might be a bit tricky as banks need established data to rely on as it provides them assurance, so a collateral would help in this case.
Banks and NBFCs unlike equity investors are not involved with the owner and the business, they just need their money back with interest and are least bothered with the business, so they don’t dictate the terms of business making it easier for the owner to run the business in the way he or she wants. Business loans can nowadays be applied for while sitting at homes, online banking has made application for loans much more convenient for the customers as well as the banks, as there is minimal paperwork involved and everything can be verified and communicated while sitting at home.
- Interest rates are reasonable:
There are several banks and NBFC’s in the loan market, there are several individual lenders as well, so there is a huge competition in this sector, the only way to be the prominent preference is to lower the interest rate so as to attract the crowd, but still, there is so much competition that it ends up helping the loan seeker.
There is a great variety of lenders to choose from with different schemes and policies, the interest rate and the amount that is loaned, etc, although it depends on the business type, credit worthiness, loan tenure, but still there always will be some or the other scheme that would suit one’s business model.
- Growth of business:
Every business needs capital to grow and expand, and business loans are undoubtedly the best way to get that required capital to provide that boost to the business that could take it to new heights. Business loans are easy to take and once approved, the owner gets the money with no questions asked as long as they repay the amount with interest on time, so they can do what they feel is best for the business.
Business loans being approved and disbursed fast and that too at such convenience while the applicant is sitting at their home has made it more accessible to businessmen, thus making their life even easier. One can also use the money from a business loan to strengthen working capital at times of a liquidity crunch so as to cover the employees’ salaries and other small expenses without
- No collateral, no profits to be shared:
There is no requirement of collateral as such for business loans provided that they meet the eligibility criteria which varies from bank to bank but usually includes that the applicant’s business must be operational for some years and must have a minimum required turnover, there must a record of last 2 or 3-years profits, the applicant must have a good credit score, etc. As business loans are unsecured, they provide a lot of help to those small businesses who have less assets but a strong business plan and are in dire need of funding.
As banks just loan money and are not counted as investors, thus they have no involvement in the business as such, therefore there is no need for the business to split its profit with the banks, thereby letting the owner retain equity unlike in case there are investors who are lending money for the business where they are likely to demand a share of the profits. Banks just need to be paid back the loan amount with the added interest on time, how the business is performing does not matter to them.
- Tax benefits:
There are often tax benefits on payable interest based on Government Schemes to promote economic activities in the country. Suppose a persona takes a business loan of INR 1 Crore, and has to pay an interest of 8 lakhs per annum on that loan at a interest rate of 8% per annum, there are schemes as per which a certain amount from the income tax that the business pays is deducted from that 8 lakhs that are owed by the business to the bank.
These schemes provide tax benefits to businesses as well as individuals are an effort so as to help the new and small businesses prosper by taking loans rather than fearing the pressure of the interest amount that would start piling up and avoiding loans, thereby letting their businesses suffer.
A business loans, thereby, can be asserted as the easiest way to grow or expand a business as they are the most convenient and easiest way to have capital in hand to fulfil the requirement of the business and there is no involvement as such from the banks or NBFC’s regarding the investment. Yes, there would the pressure to repay the loan along with that but there are several benefits as well to reduce the burden provided one consults a financial expert or conducts research regarding these things before taking the loan as managing finances properly helps a lot to utilize the loan properly and repay the dues on time. A business loan is approved easily for businesses that are looking to expand, as they usually have a strong foundation and turnover if they are looking for expansion, plus there is no collateral, so the risk is even lower. There is no need to answer anyone about where the money goes as the banks and NBFC’s are not concerned about it, in case of a business loan the only concern of the banks as well the applicant would be repayment of the loan amount on time.