As a SME owner, it is not uncommon for you to visit the banks. Particularly so when it comes to taking out commercial bank loans such as SME Working Capital Loan by EnterpriseSG or in-house business loans in Singapore. Businesses take out loans due to a variety of reasons, and business loans can come from several sources such as banks, financial institutions, crowdfunding platforms and peer-to-peer lending platforms, we have categorized them as the “Financiers”. These loans can be applied for with collateral (secured) or without (unsecured).
While interest rates is one of the key concerns for business owners when it come to borrowing money for whatever business you are in, borrowing money will bring an acceleration for your business when it comes to growth as well as a new level of risk undertaken by your company and yourself whom will be required to provide a personal guarantee.
No risk = No gains
Top 5 Reasons Why Businesses Use Debt Financing
Reason 1: Minimize or Eliminate Cash Flow Gap
Business owners totally understand the importance of cash flow in their business to a certain extent. Working capital is the money that you used to manage the daily operations of your business. There are times that businesses need loans to meet the business basic operation needs such as, payroll, rent, utilities etc until they have reached a point where the business earning capabilities is sufficient to cover their working capital needs.
Increasing and decreasing of credit terms extended to the customer and by the suppliers caused what you know as a cash flow gap, making the working capital of a business stretched. Like a rubber band, there will definitely be a point where it snaps when it goes over the limit.
Thus, banks loan money to these businesses to help them get off the ground, and as soon as their business grows, cash flow gap closes, they are able to repay the working capital loan to the bank. If you need to compare which of the loans have higher interest rates (between unsecured business loans and secured business loans), the working capital loan will be higher because it is considered to be riskier as there is no other form of collateral except the business owner’s personal guarantees.
Reason 2: Purchase of Property.
Most banks are likely to loan money to existing companies that want to purchase a commercial property to expand their operations. You see, if a company is expanding, this means that the company is likely to be more successful than the latter and banks want the company to continue.
Expansions happen when a company is churning in profit and has a positive cash flow, which means there will be a positive forecast in the future. This is a scenario that makes the bank approves the loan.
Commercial property loans come in the form of mortgage and usually have a term of 20-30 years depending on the leasehold left for the property at the time of purchase and the collateral will be the property.
Reason 3: Purchase of Equipment
Inevitable to some businesses, equipment is an importance asset to the company than owning a property. It is the key to revenue generation and a well-timed overhaul, uplifting and refreshing of equipment usually is a pain point for these businesses.
As such, the needs of new or additional equipment arise. You can either buy or lease the equipment and taking out an equipment loan is a feasible choice to make as it lightens the strain on your working capital. As a piece of equipment depreciates over its economic life, it is recommended to do a cost-benefit analysis before making the decision.
Reason 4: Purchase of Inventory
Banks give out loans to businesses in order for them to purchase their inventory. It is usually in the form of a Line of Credit and a more familiar term is Trade Finance. There are some businesses that are seasonal in nature, especially those in the wholesale trading, logistics and retail industries. Say, if the business makes most of its sales during the holiday season, then they would want to purchase most of their inventory before the holiday season starts. Some would need a bank loan before the start of the holiday season so they can purchase a huge amount of inventory to be able to match the demand. Bank loans to purchase inventory are generally short-term and most companies would pay them after the term is due which usually concludes the end of the season.
Reason 5: Expansion
Expansion is a board word that is used by many business owners when it comes to accessing loans from the financiers that covers the first four reasons mentioned as well as others such as market expansion to another country.
Thus usually, the banks will require to understand more in depth on the purpose of the loan when the word “Expansion” is used.
Regardless of the reasons, expansion generally meant a good thing. The financiers are usually willing to extend a business loan to support your growth.
So, if you are a business owner and you are looking for a Singapore business loan, reach out to us and our experienced consultants will be able to assist you by recommending the best suited financing option for your current business needs.