business finance loans

business finance loans

The Role of Loans in Business Finance: Strategies for Success

1. Introduction to Business Finance and the Importance of Loans

To be successful, businesses must generate positive cash inflows over the long term. That is, they must eventually produce revenues greater than their costs of goods sold, operating expenses, and interest expenses. While profits are important, businesses do not fail from reporting losses; instead, they fail when they run out of cash or when they can’t meet capital market tests. Those tests exist because they lack access to potential sources of capital and cannot, or at least do not, meet their obligation to repay amounts already borrowed. Harmful business cycles stem from credit crunch cycles. During a business cycle downturn, when businesses need new long-term financing the most, credit becomes more expensive. Conversely, when all looks bright during an upturn, they need new long-term financing the least and the terms attached to new long-term financing become easier.

As this text opens, it is worth noting why it is important to consider the role of loans in business finance. Businesses require occasional financing from outside sources to help meet temporarily mismatches between cash inflows receipts and cash outflows disbursements for such things as materials they acquire for eventual sale, labor service, intermediate goods they use in the process of producing finished goods, energy, and the like. More important, to finance planned capital expenditures such as research and development, new product introductions, new plant and equipment, new factories, and business acquisitions. These transactions occur in different amounts and at different times from those in which the business’s own resources cash inflows combined with other earnings are received.

2. Types of Business Loans Available and Their Features

Long-term loans (such as venture capital) are commonly associated with high-growth business plans, such as the establishment of new product lines or the expansion of a business into markets where considerable lead time and expense are required. Long-term loans would commonly be secured against business assets which are expected to increase in value over the period of the loan. The government provides finance assistance and a multitude of programs can be accessed through the government’s related website. Furthermore, guidance may be obtained through local business advisors and mentors who may provide assistance in business finance options and business loan applications.

The type of loan required by a business may vary over time. When the business is getting started, the entrepreneur may need a startup loan to cover firm establishment costs, such as rent deposits, fixtures, business setup costs, and working capital. However, there are many types of loans for businesses at various stages of development. Major business types include short-term loans for working capital, or where unexpected business costs or opportunities arise. Medium-term loans commonly match maturities of various business assets, and may be used for asset purchase or for particular longer-term income-producing projects.

3. Factors to Consider When Applying for a Business Loan

Before even applying for a loan, a business owner should spend some time discussing the best strategy, or perhaps brainstorming and discussing the loan options with a banker, financial advisor, or other successful small business owners. It never hurts to get another opinion, and these individuals can provide a “reality check” in many cases so that the loan’s objectives, costs, and risks may be re-evaluated. After this truth-in-lending session, a written business plan and loan proposal should be developed. The plan should address topics such as: projected financial statements (such as income, expenses, and earnings) for the next 3-5 years, a discussion of financial figures, a review of the businesses’ competition and marketing strategy, any relevant management advice on ownership details, investment assumptions and start-up plans. Other goals may include sound repayment schedules, summarizing collateral, and proposing financial terms, or suggesting the best type of loan. A best practice decision requires a profitable feasibility to satisfy the loan request, along with a high probability of repayment. The loan request should be tailored to match the needs of the business and the financial institution. The document should be particularly well-crafted, particularly organized, clear, comprehensive, and just long enough to complete the job.

Preparing for the Loan Application: Develop a Business Plan and Loan Request

When evaluating an essential employment tool such as a business loan, a business owner needs to balance the benefits with the costs and risks involved in use. For as many valid reasons as there are for obtaining a business loan, there are as many hurdles and pitfalls. Overcoming these obstacles will require a business owner’s comprehensive preparation, planning, and strategy.

4. Best Practices for Managing Business Loans Effectively

Understand and use the right loan instrument To underpin the first best practice of anticipating financing needs, borrowers must have an understanding of debt markets and loan products. The lending business is changing, becoming more global and technologically innovative. Here in our province, a company can now access equipment leasing and factoring, loan guarantees and export trade financing, and within Canada, a growing field of commercial finance companies. A borrower must study a continuously changing business credit marketplace and develop preferred relationships with stable, reputable lenders. The right business loan instrument can be anything from a term loan, line of credit, or a credit card, to mortgage securities, note issuance, privately marketed bonds, or syndicated credit agreements. An understanding of Canada’s diverse and changing financial environment remains critical to borrowing.

Anticipate financing needs The first, and most basic, best practice in loan management is to anticipate appropriate financing needs. Then, develop and maintain close relationships with both your commercial lender and a financial advisor for expertise as you negotiate your business needs. By developing and adopting cash or profit margin triggers for new investment, managers can start the planning process in a more timely way.

Here are a few best practices that will help you manage loans effectively and enhance your standing with creditors:

5. Case Studies and Success Stories in Leveraging Loans for Business Growth

5.1. Personal and professional entrepreneurial experience. It is important for you as the reader to be exposed to the personalities and individual experiences of these entrepreneurs. You should feel the emotional energy and understand the judgment and intuition required in obtaining the funds necessary to achieve their ventures. It is important to appreciate not only the structural issues of financing successful businesses, but also to understand how lenders view the business plans of these entrepreneurs and make their decisions. While we have not said much about the selection of commercial lenders in the previous chapters, these case studies give them an opportunity to speak for themselves through their actions.

5. Case studies and success stories in leveraging loans for business growth. In this chapter, we will analyze case studies demonstrating how loans were key to the success of entrepreneurs. Their personal experiences add a human perspective to the more technical focus of the book. The cases identified have made the process of preparing the contents of this book a pleasurable and rewarding experience for all of us. The cases have been selected to represent diverse experience, individual strategies which worked, and entrepreneurial traits which have been successful.