Getting a business loan is a big decision that’s not comfortable for everyone. It’s completely natural to want to avoid debt at all costs, both in your personal finances and when managing a business. From another angle, you can look at debt as a tool that can leave borrowers better off than they were before. That’s true with personal debt solutions like mortgages and with the right business loan.
Business debt as a growth tool
Businesses exist primarily to make money, of course, but no one has ever managed to generate cash out of thin air. Business owners need some capital to invest in location, expansion, hiring, and customer outreach efforts. Besides simply earning more revenue, a business has two general options to raise the necessary funds for these big-ticket projects: debt financing and equity financing.
Large corporations often obtain financing through debt and equity simultaneously. However, equity comes at a higher cost for small and midsize businesses and is less accessible. Whether you’re taking investments from your Uncle Larry or a group of investors, equity financing means you’re diluting your ownership and, ultimately, control of your business, and its future profits.
So why do small businesses choose debt? There are a few key reasons:
- Easy planning. Borrowers can easily plan for the cost of a loan. Under a basic, fixed-rate loan, business owners know exactly how much they will owe over a specific timeframe, simplifying budgeting and forecasting.
- Less uncertainty. The risks of debt to both the borrower and the lender involve less uncertainty than equity financing.
- Financial benefits. Along with giving up ownership stake in your company, equity financing can be more expensive for owners than a business loan. Investors expect a reasonable return on investment that, in most cases, will be higher than the cost of bank loan financing. Many business owners don’t think about it that way — they react to the interest rate of the loan. However, investors likely expect 15% return through profits and dividend distributions.
- Growth flexibility. You likely have specific goals, and structuring your debt correctly is key to achieving them. By acquiring another business with an SBA loan or adding equipment through an equipment lease or loan, for instance, you can take advantage of creative terms and financing that best suits your business.
- Contingency planning. Even if your business is currently in a high-growth phase, building a relationship with the right financial services firm gives you peace of mind with easy access to turnaround services like asset-based lending and cash-flow solutions like accounts receivable financing.
- Building business credit. Just like building personal credit as you grew into adulthood, your business benefits from a trustworthy record of debt repayment. According to a National Small Business Association survey, 20 percent of small business loans are denied due to business credit.
Keys to the right business loan
If they decide to get a business loan, owners and executives have plenty of options at their disposal, but credit requirements, loan terms, repayment plans, and more can all differ widely from one loan to another. Finding the best lender and putting that money to work is a challenge all its own.
In the search for the best debt financing plan for your business, pay attention to lenders that emphasize a more personalized, one-to-one approach. Financial institutions offering business loans are numerous, but only a select few can offer the terms your business can manage combined with the level of service you deserve. A long-term, trusting relationship with a financial services partner is a competitive advantage. Along with financing options to meet your current business needs, you’ll benefit from inside industry connections, specialty finance options such as equipment financing, accounts receivable financing and asset-based lending, and even private wealth services like business succession, and trust and estate capabilities.
In addition to putting quality first, it’s important to understand how loan terms are structured to meet the needs of your business along with the financial metrics that will govern repayment. The right debt financing options for any organization are those that work within their individual revenue cycle and its asset structure. Never sign anything you’re not comfortable with – ideally your lender should spend the extra time to make sure you understand all the terms and paperwork.
Debt is not just about your bottom line now, but propelling your company to a strategic advantage for a profitable future. In our current competitive business landscape, it’s important to use all the tools at your disposal to position your business, including forging a connection with a reputable, responsive financial services firm that can help with niche business financial solutions.