IAN FERGUSON: Why small businesses must rethink bank loans


Ian Ferguson

Capital is critical to any business, enabling companies to acquire the necessary resources to start up, expand and maintain operations. Access to capital is thus essential for a business to grow and succeed in a competitive market. This becomes critical for small businesses that have limited capital to begin with, yet are competing against medium and larger companies with greater economies of scale.

Capital helps businesses to develop and implement strategies, invest in new products or services, and expand into new markets. It also enables companies to manage their cash flow, which is essential for day-to-day operations. Such financing also plays a crucial role in decision-making. It helps owners evaluate the potential costs and benefits of different courses of action, and make informed decisions about investments, expansion and other essential business matters.

Finance is also essential for businesses to manage risk. Financial management tools such as budgeting, forecasting and financial analysis can help companies identify the potential risks and develop strategies to mitigate them. This is essential for businesses to survive in today’s uncertain economic environment.

Access to finance becomes necessary for small businesses to give them:

  • Capital for start-up and expansion

  • Working capital for day-to-day operations

  • Financing to acquire equipment and inventory

  • Financing for research and development

Although cash flow is undoubtedly the greatest challenge for small business operations, many companies are still reluctant to approach lending institutions for financing. This week's article provides three of the main reasons why small businesses should rethink this position:

  1. You keep full control of your company

The main advantage of a bank loan, as with any kind of small business loan, is the ability to get a capital injection that boosts cash flow without losing any control of your company. With some other funding options, such as equity funding, you will be selling company stock to investors to get immediate financing, which means you will have to share the profits when you have other investor(s) on board. A small business loan is a more temporary measure, so once you pay off the loan you will have no more obligations to the lender.

  1. Allows you to grow your business

Bank loans are a convenient way to get extra finance without needing to wait until your business has generated enough profit to fund expansion yourself. Taking out a loan means you can put your plans into action much earlier, and take advantage of any business opportunities that present themselves, enabling faster and more accelerated growth.

Even though it can take weeks, or even months, to apply and get approval for a bank loan, this is still a practical way to raise funds to grow your business.

  1. Cost Effectiveness

The interest rates on a small business bank loan can be cheaper those available through other online lenders. Especially if you are looking for a long-term funding option, taking out a bank loan will normally provide much better value than using an overdraft, credit card or a personal loan.

You will find banks are a particularly cost-effective option if you have an existing business with a good credit score and financial history. The more established and successful your business, the less of a risk you will appear to banks, and so they are more likely to approve your application and offer you attractive interest rates. Taking out a secured loan will also help you to get lower interest rates.

• NB: Ian R Ferguson is a talent management and organisational development consultant, having completed graduate studies with regional and international universities. He has served organisations, both locally and globally, providing relevant solutions to their business growth and development issues. He may be contacted at tcconsultants@ coralwave.com.


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