Welcome to the topic “Best uses for Business Loans in 2023”
Best uses for Business Loans in 2023
If you’re considering starting a new business, you better start thinking about the most important factor: money. Setting up a new business requires investment, and you can ask anyone with knowledge about business or economics to confirm it for you.
Those who study economics consider it one of the four main factors of production, and the importance of capital in business cannot be understated. Most new businesses fail when they run out of money. Thus, it is reasonable to argue that the amount of capital you have and how you choose to use it is the single most important factor in the success of your business.
For most people, however, coming up with the amount of capital needed to start and run a successful business is impossible. The recent—and, in some ways, ongoing—pandemic and rising energy prices have depleted most people’s savings. In such turbulent circumstances, most people can’t start a new business without taking on a loan.
Business Loans: a necessary evil?
Loans of all kinds have earned themselves a bad reputation. Most people have heard stories of their friends or acquaintances drowning in debt, especially in the age of an ongoing student loan crisis. Moreover, most people are just not willing to take up the stress associated with being in debt. These factors, paired with uncertainty surrounding new businesses, pushed entrepreneurs away from the option of debt.
However, a more careful analysis indicates that business loans are not, by nature, evil or predatory. Many companies have been successful through the gift of business loans. Besides, selling off equity is not sustainable, especially when you value your and your business’s independence. Furthermore, you can reduce the risk associated with taking out a business loan by carefully analyzing how you will spend it.
Therefore, entrepreneurs should not shy away from taking loans to kickstart their businesses. Instead, they should carefully analyze how much money they need, how they wish to spend it, and how that spending will enable the company to pay back the debt. The key to taking out loans is to get all the information, be realistic and honest with yourself, and plan out every step of the loan.
How to spend your loan?
In the internet age, people have access to tons of information about many topics. And in the internet age, people also have access to tons of Misinformation about many issues. Search how to use a business loan and find people trying to sell you online courses, books, and other content that promises you a simple and blanket solution.
These blanket solutions, unfortunately, do not work for all businesses. Every business is unique in its working and will thus require a different composition for spending. The answer, then, is to gather as much information about your business and plan out as extensively as possible.
You must know certain things about your business before you can even consider spending your loan. These include the relative importance of each component of your business, how long each part will take to pay you back, and how many dollars you can expect to earn back on each dollar you spend. In the end, your spending decision will come down to the following four aspects:
1. Operations
The first aspect is the most important and includes the day-to-day expenses of the business. The day you can no longer pay your employees or fulfill your daily liabilities is the day your business shuts down. The business’s operations are of utmost importance, as any business ceases to produce and exist when it can’t meet its operational costs.
Fulfilling operational costs can be a headache at the start and often keeps your business from reaching its full potential. Taking out a loan to spend on day-to-day operations for, say, six months relieves the entrepreneur of unnecessary stress. The entrepreneur can then focus on growing the business and helping it stand on its feet.
Operational costs can still be a big issue for companies that are already established. In times of uncertainty, taking out a loan can help them stay afloat. Many businesses took out loans during 2020 to ensure they don’t have to shut themselves down. Today, with rising fuel and energy prices, many companies are suffering. Business loans for operational costs can be a breath of fresh air for those businesses.
2. Marketing
Customers are what make or break a company. You can be an expert in raising and using capital, but it will be no avail if your product doesn’t catch on with customers. Thus, the most sustainable business strategy is to have a customer-first focus.
After all, your product can have the best features, your operations can be most efficient, and your credit line can be impeccable, but it will all be to no avail if customers don’t want what you’re selling. Therefore, companies should focus on attracting customers as they are the company’s best bet for being successful.
The money you spend on marketing, however, must first be analyzed. You can use the four Ps of marketing—product, price, place, promotion—to determine how best to spend your marketing budget. It would be best if you also decided how to spend your marketing budget depending on your target market.
Some businesses might need flashy advertisements, while others might need to sponsor events. It might also require sales representatives or even miscellaneous expenses of building personal relationships.
Whatever your company needs, you should first analyze how each dollar spent will benefit you. If your $10,000 loan is being spent on an advertisement bringing in only $300 additional revenue, you’re not doing something right.
Especially if the interest you’re paying on that loan is more than 5%, i.e., $500, you should then carefully understand the dynamics of each dollar being spent and create a marketing mix that maximizes your revenue and helps the business not only stay afloat in the short-run but also helps it develop a long-term brand and customer base.
3. Other investments
As we’ve discussed, the interest rate on your loan can seem like a hanging sword. Sometimes, though, this interest rate can be used to benefit the company. If a company can secure a loan at a very low-interest rate, it can explore the option of reinvesting that cash.
After all, investing in a scheme that pays more than the loan’s interest rate would mean that the company is making profits doing nothing. This profit can be used to keep the company afloat and bolster revenue in times of uncertainty, and it can provide extra cash to be used elsewhere.
Some companies can get creative with their reinvestments. You can use these loans to pay back other loans you might have taken at higher rates. For example, a new company might have been forced to take an 8% loan when it started. Due to a greater reputation in the market now, they might be able to secure a 5% loan. Using that 5% loan to pay back the 8% loan is a win, no matter how you view it.
Companies and entrepreneurs should remember that they can be creative with their capital structure. No matter how you structure it, the end goal is too profitable and keep the company afloat. No one cares how you do it.
4. Add, repair, or upgrade equipment
Every business requires production equipment. Some of this equipment is more directly involved in producing goods and services, while another machinery is indirect. Therefore, the quality and state of both kinds of equipment are integral to the quality of the business’s goods and services. Thus, it makes perfect sense for companies to invest in equipment.
When you invest in equipment, the quality and rate of production of your goods and services rise, leading to satisfied customers, efficient production, lower costs, and consequently higher revenues. More times than not, a business’s investment in equipment will justify itself within months and start paying the company back.
We know that investment in equipment does not go in vain. For new businesses, this investment might mean buying new equipment. For established companies, repair may be a routine task. In the age of technology, businesses also have to spend sums on upgrading their equipment to stay up to date with rapidly changing business environments. Some companies might even spend on new equipment needed to expand a business.
However you spend on equipment, you must ensure that you track your expected earnings. If buying new staplers for the entire office is not likely to bring you a large enough increase in revenue, there’s no point in taking on that expense. On the other hand, a payment that fully maximizes your revenues or decreases costs must be adopted.
Conclusion
While there are four main aspects, you don’t have to necessarily spend all your money into one. You can create a mix that best suits your business and maximizes chance of success. However, when making any kind of payment, you must ensure you analyze the return you expect on it.
This return must always be greater than the interest rate you’re paying to your lender. Get a marker and write than interest rate on a board in your office, and try to analyze investments that give you a greater return. As long as your return is greater than the interest you’re paying, you’re good to go.
For more information on Best uses for Business Loans in 2023, contact us at Speed Financial Group.
Also read “How you can prepare your Small Business Tax Strategy“
