7 Reasons SMEs get Loans
Why should SMEs get loans? The truth is that Small and medium enterprises (SMEs) play a big role in the economy. Although these SMEs grow in numbers, there are major setbacks such as lack of adequate capital and funding. As a business expands and gains a competitive advantage, the existing capital may not be enough to support growth and achieve its goals.
However, a certain misconception about SME financing is the notion that taking on debt is always a bad thing. Many people still associate loans with SMEs having financial difficulties and cash flow problems and often assume that companies will only take up loans if they are in a poor cash position.
What’s a Loan?
Loan is a sum of money companies and businesses borrow from banks and financial institutions, the borrower agrees to a certain set of terms including any interest, repayment date, and other conditions. In some cases, the lender may be required to secure the loan and ensure repayment.
The main idea behind taking out one is to get funds to grow one’s overall money supply. And there are many reasons why SMEs take loans, in this article, we will uncover perks and why SMEs in Nigeria take business loans.
Why does SMEs in Nigeria take Loans?
Expansion and Rapid Growth:
One of the ways businesses can leverage or become more successful is expanding beyond their current capacity. Successful businesses are always looking or exploring new ways that can grow in their industry. To achieve this expansion, most SMEs take out loans.
These loans are used to support their expansion and new investment goals. Also, relying on only cash-flows to finance growth is often not sustainable or insufficient for businesses and may cause them to take a longer time to reach their goals. Therefore, many successful SMEs choose to leverage business loans to accelerate its expansion and growth.
To Purchase New Technology and Equipment
To attain efficiency, businesses need to leverage on technology advancements. So, small and medium enterprises that seek new technology and equipment, often borrow loans from financial institutions to cushion the effect of a huge amount leaving the company’s account. With the new technology, these businesses can successfully hack efficiency and speed up their production or increase their productivity rate.
Want Increase Inventory
Inventory is one of the biggest expenses for any business because businesses need to keep up with the demand by replenishing your inventory with plentiful and high-quality options. Before a business sees a return on the investment, they would need to purchase large amounts of inventory. Especially times when you may need to purchase a large amount of inventory without the cash on hand to do so, and this necessitates loan.
Because existing cash-flows are insufficient, and available funds might have been utilised in preparing for the holiday season. As a business owner, it’s not advisable to limit the inventory that you will sell during the holidays. Instead, you should double or increase it more than the regular periods. And this why most business owners end up seeking extra capital to buy a large amount of inventory.
To Avoid Cash Flow Problems
Another reason why business owners collect loans is because of cash flow issues. For instance, these cash flow issues might revolve not having enough funds to pay for the suppliers or lack of funds for rental fees. Most times, businesses don’t prepare for this and can lead to business failure.
Hence, one of the ways you can eliminate or avoid a cash flow crisis as a business owner is securing a loan to achieve a positive cash-flow. These unexpected circumstances may cause an inevitable fall in period cash flows. But they can be easily remedied through undertaking business loans in advance, to allow cash to be set aside as a buffer against such circumstances.
A stable and affordable line of credit also allows your business to continue operating as normal during cash-strapped periods. Generally, loans help prevent your overall business cash flows from being susceptible to uncontrollable situations and cyclical downturns.
Capitalize on Business Opportunities
Doing business in a competitive market often brings unexpected opportunities like discounted bulk orders of inventory, lowly priced office space, and taking a loan is the ideal way of capturing these opportunities. Accessing the loan is important because buying bulk orders at a discounted price can be a great way to increase your business’s revenue.
Buying some capital-intensive machinery can also help increase productivity. Especially if your business risks having insufficient funds to complete the project or unexpected expenses are incurred midway through. Securing a loan is only ideal to cover these initial investments.
To Build Credit Worthiness
Growth is constant, and as a growing business, it’s key to find new ways to tap into any opportunities that would pump up your growth rapidly. To achieve this goal, securing a business loan is an answer.
Start with the smallest loan offer and repay it on time. As it continues to be a responsible borrower, it leads to having a high credit score. With a high credit score, you are more likely to get loans whenever these opportunities come up. Apart from having access to loans easily, you can receive low-interest rates on loans too.
Cheaper than Equity Financing
Most businesses shy away debts because of the risk involved. However, incurring debts for the expansion of your business is cheaper than equity financing. Equity financing is the process of raising capital through the selling of shales. By selling shares, they sell ownership in their company in return for cash, like stock financing. Businesses usually have to give up a percentage of the business, between the range of 5% or 10%.
With debt financing, you still have full control of your business. Ownership governs your control over management decisions affecting small decisions such as the hiring of workers as well as big decisions such as which projects to undertake.
Conclusion
Getting a business loan is an ideal option when you want to reach success for your business. Many reasons exist for why a business owner may consider a loan, if when all costs are factored in, and taking the loan is more likely to improve your bottom line, then take it.
