7 Ways Loans Can Help Grow Your Business
From adding new hires to refinancing current debt, Fifth Third Bank offers 7 ways loans can help grow your business.
The case for small business loans is clear: They carry relatively low interest, offer predictable repayments, help smooth the gyrations of high costs and allow entrepreneurs to retain ownership while growing their companies.
What’s less clear are the best ways these loans can help grow your business. Here we look at the top seven ways to put your loans to the highest and best use for growing your business.
1. Digital Tools for Efficiency, Security, and Connectivity
A full 80% of small businesses in the U.S. are not taking full advantage of digital tools, according to Deloitte’s Connected Small Business study. For many companies, the transition to a remote workforce has called for an unexpected one-time cost to upgrade technology for communication, file sharing, collaboration, e-commerce and security.
Rather than see these as costs, owners should consider them investments. Compared with their less-connected peers, digitally advanced businesses earned two times as much revenue per employee and experienced four times the growth over the previous year, according to Deloitte’s study.
2. Add New Products to Improve Profitability
Small business loans can have a major and immediate impact when they are smartly deployed to launch a new product that will be immediately accretive to revenues. Lines of credit allow you to draw only what you need to launch and market your new product on a rolling basis. While there are other ways to finance new product rollouts, having a dependable line of credit helps avoid cash flow gaps.
3. Working Capital that Prevents Backslides
Loans can also be used for working capital to help entrepreneurs move their companies forward. Some businesses are seasonal—winter gear manufacturers, ice cream shops, swimsuit retailers—but their costs are not. As we’ve seen recently, many industries have suffered COVID-19 slowdowns but could soon see a resurgence in demand for products and services.
Loans for working capital can help bridge the transition from slow times to busy seasons, ensuring that business doesn’t move backward. Such funds can be a stopgap for keeping current with suppliers, contractors, and employees.
4. Dry Powder to be Opportunistic
Some higher costs of doing business involve making strategic acquisitions to grow your business. Working capital or lines of credit allow companies to be ready to seize the moment when a key growth asset comes on the market. Lines of credit are especially useful for these opportunities because they are more flexible than traditional loans and allow you to draw capital when needed.
5. Refinance Debt to Reduce Capital Costs
Perhaps the oldest and best use of capital—and one with an immediate effect—is paying off higher interest debt with lower interest long-term loans and reducing overall debt payments.
While growing, many small businesses accrue various loans of various interest rates. Approximately 40% of small businesses have outstanding debt in amounts up to $100,000, according to the Small Business Credit Survey from the Federal Reserve. The stakes are high, too, as most of these businesses use personal guarantees as collateral to secure this debt. Bank loans offer a reasonable rate to help consolidate and lower debt payments and free up capital for growth.
6. Optimize and Expand Inventory
Seasonal retailers know how important it is to have product on hand at the point of sale. A local bookshop owner may anticipate a rush on a bestseller. A bike shop sees opportunity behind ongoing problems with public transportation.
Whether for online sales or in-store sales, inventory is revenue in passive form. Ramping up for high-season in a financially sensible way often means obtaining a small business loan. With inventory loans for small businesses, that inventory generally becomes the collateral for the loan, so owners don’t need additional personal guarantees. Rather, they can repay the short-term loan as they sell through their inventory.
7. Loans Provide Funds to Hire New Talent
Small businesses grow by having the right people in the right positions. When that perfect person comes along who will help the company grow in new directions, the labor market is too competitive to not pounce.
Having the ability to close the deal quickly and successfully onboard new hires helps small businesses compete for talent against bigger corporations. Smaller companies have the advantage of a shorter hiring period than their larger counterparts (34 days compared to 41 days), but having funds to make those strategic hires is key to hiring top talent to grow the business.
While small businesses want to be mindful about managing their balance sheets, the right debt can offer a return on capital that will pay for itself many times over.