If you get locked in unwieldy debt, it could mean the downfall of your business. However, in spite of any intrinsic risks, loans are also a tool and, like any other tool, if used correctly, loans can help your business prosper and even encourage better financial management. Wondering how? Here’s a look at a few of the ways that a short-term business loan can help you manage your business finances more effectively.
Reducing interest rates
The cost of a loan is reflected in its interest rate and fees. If you have high-interest debts, paying them off with a loan with a lower interest rate saves you money in the long run. Additionally, if the term of the loan is the same, the loan with the lower interest rate boasts lower monthly payments, freeing up working capital every month and making it easier to stay on top of your business finances.
Paying off credit card debt faster
Typically, business debt can be divided into two categories: long term and short term. Long term debts include mortgages, vehicle loans and any other loans that take more than a year to pay off. Short term debts, in contrast, are debts that are due within the next 12 months. Note in accounting, the portion of a long term debt that is due during the current year is considered to be a short-term debt.
Credit cards can be considered short or long term debt depending on how long you take to repay them, but if you are only making the minimum monthly payment each month, it can take two or three decades to pay off a credit card. Fortunately, if you need more discipline so you pay off your credit cards faster, you may want to consider a short-term business loan to repay your credit cards. Then, you can use the fast-paced repayment schedule of the short term loan as incentive to pay off the debt faster than you would have if it were still on a credit card.
Covering start-up costs
Capital is essential to starting a business, and if you don’t have enough start-up funds, you may be juggling bills, delaying accounts payables from day one, and missing valuable business opportunities. In cases like this, taking out a short term loan allows you to jump start your business. Once you’re on level ground financially, you can focus on operating your business rather than jumping through financial hoops and worrying about not being able to pay your bills.
However, don’t just pick a random amount and take out a loan. Make sure that you have closely analyzed your likely cash flow and ensure that you can repay the loan based on your projections. Use a disciplined budget and leverage the loan to help you succeed.
Jumping on new opportunities
As a business owner, you don’t want to turn down deals that could make you money. However, in some cases, you may not have the equipment, space or staff you need to get the job done. With a short-term loan, you don’t have to turn down deals. Instead, use the loan to fund the supplies you need to accept the work, grow your business and increase your revenue down the road.
Saving time and money
Just as business loans can help you handle projects that you may not otherwise have been able to handle, they can also help you save time and money. Is there new software that will allow you to process sales faster, track inventory better or communicate with your staff more effectively? Will that investment ultimately tighten your business processes and make you more money? If so, it makes financial sense to use a loan to invest in those types of things.
Similarly, in other cases, the savings may be more pedestrian. For example, if putting new windows in your restaurant, a new heater in your factory or better ductwork in your office promises to lower your energy bills, a loan may also make sense.
Reducing tax liability
In other cases, short term loans may help you reduce your tax liability. Need another write-off to jump down a tax bracket? If the tax savings are greater than the interest payments, you may want to take out a short term loan to buy equipment, invest in software or make other business purchases that can offset your revenue, reduce your profits on paper and lower your tax liability.
Like knives, loans can be dangerous, but like knives, they can also be incredibly effective, even lifesaving tools. If used well, short-term business loans and other types of debt can help you expand your business. However, you should also strive to use these tools in ways that ultimately foster your own financial management techniques and objectives.