4 Good Reasons to Take Out an SME Loan
Small to medium enterprises or SME’s are borrowing commercial bank loans with the hope that the borrowed working capital will become more profitable. Loans may come from sources other than banks, such as credit unions, public funds, or private investors. These small to medium enterprises may likewise use inventory or accounts receivable as collateral.
Depending on how and where the loan originates, borrowing money could be severely costly, as interest and fees are associated with almost every loan. Businesses can and should calculate the total amount of interest paid in the entire loan before accepting one.
Below are four reasons why an SME loan may be worth the risk:
To Purchase Real Estate and Expand Operations
Banks are likely to lend money to existing firms and companies that want to purchase real estate to expand their operations. Expansion generally occurs when a company is making a profit, has an increasing cash flow, and has positive forecast numbers. This is a scenario where a bank is likely to approve small business loans. Bank loans focused on real estate are normally in the form of mortgages. Long-term bank loans will utilize company assets as collateral and require monthly or quarterly payments from profits or cash flows.
The term of these loans may differ from three up to twenty-five years and may have an interest rate associated with its repayment.
Businesses have two options for the acquisition of equipment: they can purchase or lease equipment. If the business owner borrows money to buy equipment, he or she can collect a tax write-off in the first year and depreciate the rest of the equipment over his or her economic life.
Equipment could also be sold for salvage value if it is out of date or no longer working. A cost-benefit analysis is required to decide whether it is better to purchase or lease equipment for a given company. When a bank makes a facility loan, it is usually a mid-term loan that runs for less than three years and is returned in monthly installments. Repayment will normally be tied directly to the serviceable life of the machines being financed.
Banks sometimes provide short-term loans (repaid within one year) to small businesses that have established trustworthy relationships with the bank. Payment on time and a positive balance in a check or savings account are ways to build trust with a bank. Some small to medium enterprises are seasonal in nature, like retail, hospitality, tourism, and farming. If a business makes most of its sales during the holiday season, a short-term loan may be made and granted to purchase most of its inventory in advance. Bank loans to purchase inventories are generally of a short-term nature; companies are strategizing around repaying them once the season is over, using their seasonal revenues.
Increase Working Capital
Working capital is the fund used to manage day-to-day business operations and expenses. Small enterprises may borrow to meet operating costs until their earnings reach a certain amount. If the debtor has great credit and a sturdy business plan, a bank loan may offer short-term money to get off the ground and grow. Working capital loans usually have a greater interest rate compared to real estate loans since banks consider them riskier; if the business is mismanaged at a crucial time during infancy, or if the business’s earning assets never generate a profit, the company will face bankruptcy.
Of course, no SMEs should take on loans that are not necessary, but there are instances when a loan is the right decision to keep your business afloat. Always weigh the pros and cons of an SME loan, but if it has the potential to grow your revenue, it might be wise to look at your SME loan opportunities.