One of the major problems of a small business is cash flow. Very often businesses need a loan to
move on to the next stage of business operation. Once a loan is approved a big question arises
before the companies: How to spend the business loan? One fundamental rule is to spend the
money effectively so as to get a return on the investment. The following are some of the things on
which businesses spend money on.
1. Start a New Business
An entrepreneur usually takes a business loan to start a new business. Although banks may be
hesitant to give funds to a start-up a good project idea backed a detailed project plan can help here.
A start-up business loan can be obtained from a bank, non-banking finance company or other
lenders.
2. Purchasing Inventory
An understocked or a sold-out inventory means dissatisfied customers which is bad for a business. A
successful business hinges on having the required merchandise to fulfil the needs of the existing
customers and also provide products to reach out to new customers. A business loan can be used
here to refill the existing stock or buy new inventory. This will increase the sales and bring in profits.
However, using a loan to purchase inventory involves analysing a lot of factors like the cost of the
loan, the inventory turnover time etc.
3. Purchase of Equipment
As a business grows, a company will need to increase its production to meet the demands of its
increased customer base. This might sometimes call for buying a new machine and replacing or
upgrading an existing one. Especially for a manufacturing company whose operations are dependent
on machinery and equipment. This expense on machinery cannot be neglected. Buying a new
equipment is costly and a business loan can be used for it. Companies need to however decide if
they should buy new equipment or lease it. A cost-benefit analysis of the two options can help the
company arrive at a decision. By investing in buying new machines companies can reduce the
maintenance costs, improve productivity.
4. Operational Expenses/Working Capital Needs
Companies also take loans to meet their operational or day-to-day expenses. These include expenses
like employee salaries, raw material costs, utility bills, gas, rent for property etc. These activities are
needed to keep the business going and company cannot defer spending on these activities in case
the earnings are not sufficient to meet the expenses. A portion of the business loan or a short-term
business loan can help to smoothen the business operations.
5. Expanding Operations
Once the company has established itself and is making profits, the promoters will look for expansion.
A business loan can aid to buy a new property, open a new division, penetrate a new market, up-
scale the production, tap into a new business opportunity, move to a new premises etc. Since the
business is already established banks are more likely to approve a small business loan for these
purposes.
6. Marketing
The need to make one’s brand more visible in the customer’s eyes has never been greater.
Marketing and Advertising have become essential to businesses in today’s competitive landscape. A
company has to allot a major share of its revenue to marketing in order to build its brand and
increase its customer base. Small businesses and those in their early growth stages may not have
sufficient income to fund their marketing initiatives. A business loan can help these companies with
their marketing plans.
7. Human Resources
A business that is growing feels a need to hire more people as it is no longer able to function with
few workers playing multiple roles. Hiring new employees is imperative. Only then can the business
keep running and be competitive and innovative. Small businesses can use a loan to recruit new
talent and also train the existing employees.
The other reasons for which a business loan can be used are
1. Capitalize on a New Business Opportunity
2. Refinancing or paying other debts
3. Building credit for the future
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