Small businesses face a number of financial challenges, especially as they establish their brand and clientele. Yet, by securing stable access to financing, small businesses can quickly grow and expand into new markets. With reliable financial stability, businesses can better manage their cash flow, plan for the future, and invest in new opportunities.
Of course, financing can be risky. If a business is unable to grow in line with its financing terms, it may fall into debt or default. As a result, small businesses should only secure financing when they need it and are confident in their ability to repay the loans. In the following article, how financing options can benefit small businesses, and how business owners can offset their risks is discussed.
Financing Can Cover the Upfront Costs of New Equipment and Infrastructure
As a business grows, it undoubtedly requires new equipment to accommodate an increase in production or services. The upfront cost of this new equipment can be expensive and may require a small business to take out a loan. The same is true for businesses that are expanding their operations into new facilities. The good news is that this type of financing can be found relatively easily and at reasonable rates.
Using financing to cover these upfront costs is generally viewed as a necessary investment in the business and one that pays off in the long run. As the business grows and develops a wider clientele, the equipment pays for itself and eventually generates raw profits, which can then be reinvested into the business.
Financing Can Grant the Freedom to Hire New Employees
Rapidly expanding businesses need more than just new equipment—they also require new employees to man the equipment and maintain operations. The costs of salaries and employee benefits can quickly add up, putting a strain on a small business’s finances. Fortunately, financing can help businesses meet these costs without having to cut into other areas of their budget.
By taking out a loan to cover the cost of hiring new employees, businesses can maintain their current financial status quo while they train and onboard their new staff. Once the employees are up and running, the business can start generating additional revenue to repay the loan.
Financing Can Help Businesses Manage Seasonal Sales
Many small businesses experience fluctuations in revenue throughout the year. This is often due to seasonal changes in demand or changes in the availability of raw materials. Whatever the cause, these fluctuations can make it difficult for businesses to manage their cash flow and stay afloat during slow times.
Financing can help businesses even out their cash flow by providing a cushion of working capital that can be used to cover expenses during slow times. This way, businesses can maintain their operations and keep their employees employed even when sales are down. When business picks back up, the loan can be repaid with the additional revenue.
How Small Businesses Can Overcome the Potential Risks of Financing
When a small business chooses to take out a loan, it does so with the intent of investing the funds. Yet, as with any investment, there is a level of risk involved with taking on new debt. Fortunately, there are a few ways small businesses can offset their risks:
- Consider a line of credit instead of a term loan: A line of credit gives businesses more flexibility in how they use the funds and when they repay the debt. This can be helpful for businesses that experience fluctuations in their revenue.
- Get a co-signer: If a small business does not have a strong credit history, it may be difficult to secure a loan on its own. In this case, businesses can ask a family member or friend with good credit to co-sign the loan.
- Research the lender: Not all lenders are created equal. Some lenders may offer more favorable terms than others. As such, it is important for businesses to do their research and find a lender that meets their needs.
Most importantly, though, it’s crucial for small businesses to shift their thinking. Rather than fearing debt, they should view it as a healthy aspect of their financial planning and view the sum as a long-term investment into their futures.
When small businesses embrace financing as a viable investment in their futures, they can quickly expand into new markets by covering the costs of new equipment and employees’ salaries. Of course, managing new debt does require some planning and a shift in thinking to offset potential risks. When done successfully, though, financing can provide the capital a business needs to grow.