Reasons Why Business Loans Are Financially Beneficial
In today’s cutthroat market competition, a sound financial strategy is what gives edge to an organisation over its competitors. While some rely solely on owned capital, others try to leverage the benefits of debt financing to enhance their organisational competence.
Although the reasons to avail a business loan can be aplenty, individuals often shy away from this strategy, concerned of how it’d affect their liquidity. However, strategic mobilisation of borrowed funds can do more good than bad to any organisation.
So, how are business loans financially beneficial for your enterprise? Read on to find out.
Manage Working Capital
Businesses require a regular amount of cash in order to make routine payments, purchase material used in the production of goods, or cover unexpected costs. On the other hand, payments from customers can come in sporadically, which creates a disparity in working capital. However, sufficient working capital is a prerequisite to conduct day-to-day operations for any organisation.
Business owners can utilise a business loan to meet their working capital requirements. The loan ensures the flow of sufficient working capital, ensuring that a business’ operating cycle remains unhindered. It also enhances the liquidity and solvency position of a business concern. Subsequently, it improves a company’s earnings and profitability in the long run.
Flexibility To Choose The Loan Tenure
There exists an array of business loans, each of which caters to a specific business need. Borrowers can opt for a business loan that fulfils their financial requirements and business goals.
One can choose between a short-term or long-term loan with different loan amounts and repayment tenure. Short-term loan repayment periods generally extend up to a period of 2 years, whereas those of long-term loans extend up to 5-10 years. So, a business owner must choose loan tenure as per his/her business calculations.
Optimise Business Infrastructure
Enterprises must strive to offer seamless and uninterrupted services to its clientele. For this purpose, it is vital for them to have a well-defined and updated business infrastructure. These infrastructural amenities include delivery channels, storage units, payment gateways and business security, among others. A business loan can be used to develop and maintain a sound infrastructure for the smooth functioning of a business.
Build Credit Record
From start-up costs to business expansion, establishing a decent credit profile can help companies with their immediate ventures and upcoming business plans. And, short-term business loans are an ideal way to develop a credit record.
Enterprises can boost their credibility by repaying these loans timely, which reflects on their credit score. Additionally, this also sets up a business to be eligible for higher business loan amounts in the future, if the need be.
Avail Tax Benefits
Businesspersons can use their loan amount for a variety of purposes. Moreover, they can avail tax deduction on business loan interest paid from profits. As per the Income Tax Act, 1961, the interest paid is tax-deductible and can be written off as payments made for business expenditures. So, a borrower can lower his/her taxable amount by deducting the interest amount from the expenditure.
Every enterprise, after achieving a certain level of success, needs to expand its operations, either in scale or range. This expansion can lead to a multitude of benefits, such as attracting new customers, revenue diversification, and building greater brand recognition.
However, relying on capital reserve wholly to expand can spell trouble for any organisation in the long-run. Here, an enterprise can utilise a business loan to fund its expansion and venture into newer markets as well as a larger customer base.
External business finance, therefore, comes with several benefits. The funds so availed can be utilised in numerous ways by a businessperson, eventually leading to profit maximisation.
However, business loans from banks and NBFCs usually levy a high rate of interest and additional fees and processing charges. The interest rate differs premised on various factors, like collateral, loan tenure, or borrower’s creditworthiness and repayment capacity. Moreover, availing a business loan can be quite cumbersome as it entails extensive documentation, which ultimately increases the processing time.
Business owners can venture into other sources of financing, such as invoice discounting. This financing solution offers quick funds against unpaid invoices of a business, thus, mitigating its cash crunch without adding on to its debt burden. It also reduces the hassles of availing a business loan effectively by offering easy access to the required funds.
The competitive and dynamic economy of today calls for businesses to acquire adequate funds to sustain their operations. Enterprises can opt for a business loan to that end. The funds availed can be invested to meet the working capital requirements, optimise infrastructure, or undertake expansion. Additionally, business loans can also offer tax benefits and boost a firm’s credibility. As a result, these loans allow business owners to fulfil their short-term and long-term goals and take their company to new heights.