This article was first published on DollarsAndSense.sg.
For many of us non-business owners, taking a business loan could be seen as a rather risky proposition.
As many of us can imagine, investing our time and personal savings into a business is already risky as it is, taking a loan for our business would only seem to add to the already high risk that entrepreneurs have to take on.
Loans Are Not Always Bad For Businesses
Similar to how many of us manage our personal finance, it’s natural that many of us also form the opinion that taking a loan, or incurring any form of liabilities, is a bad thing. However, this isn’t necessarily true for businesses.
In fact, some of the world’s biggest and most successful companies, such as Apple, Google, and Netflix, have billions of dollars in debt, yet no one would consider them as reckless companies that are borrowing too much. In fact, many investors would willingly lend these companies even more money, knowing that these companies will be using the debt to fund their growth.
The simple reason why it pays (literally) for companies to take on debt is because it’s seen as a cheaper way to finance and expand operations compared to raising equity. Moreover, most businesses are meant to be profitable and taking a business loan can help to increase profitability when it’s deployed for the right use.
Most entrepreneurs also know that when it comes to running a business, you often need to be spending first in order to generate your returns. Many companies, even profitable ones, having to manage their cashflow carefully. A business loan helps with this.
“Cashflow management is probably the second most important thing (after leadership).”
Vincent Ha, a serial entrepreneur in Singapore who has successfully started multiple businesses including a video production company, a social media agency, an influencer marketing agency and more recently, a new FinTech startup, shared with us that “cashflow management is probably the second most important thing that entrepreneurs need to do well after leadership, without which, you will not be able to take care of your people.”
How You Use Your Business Loans Matter More Than The Amount You Borrow
When it comes to business loan, what you do with the money you borrow is often more important than how much you actually borrow.
“To generate an increase in cashflow for the future.”
Vincent also shared with us that, “ideally, what you want is to be using the business loan to generate an increase in cashflow for the future, as opposed to using the loan for risky investments, or to fund new ideas that are unproven”.
This is similar to the use of leverage when it comes to investing and trading. Borrowing money to increase your investment and trading position makes sense – but only if you have an advantage and are likely to generate a higher return on your investments and trades, as compared to your cost of borrowing.
However, if you don’t feel that you have an advantage and just want to try out a few (unproven) strategies, then it’s better to be doing so in small amount, without using borrowed funds as this only increases your risk.
The first business loan that Vincent took was for his influencer business Gushcloud. Back then, the company was expanding and needed working capital in order to manage its cashflow.
To solve this, Vincent took an SME Working Capital Loan from OCBC – a government assisted SME loan for businesses in Singapore. This is a loan which is not only collateral-free, but can also be applied and approved within minutes, with no early redemption fees. Businesses can borrow up to $300,000, repaid over a period of up to 5 years.
Updated 31 March 2020: The SME Working Capital Loan quantum has been raised to $1 million.
Companies in the food manufacturing sector are also familiar with taking business loans.
“To expand our production capacity and to increase revenue.”
Tan, a second-generation entrepreneur who is helping run his family business (the company is in the food manufacturing sector and wanted to stay anonymous for this interview) shared with us that “his company takes business loans to finance the purchase of new machinery and equipment and that they will stretch out the loan for as long as the bank allows them to do so. Taking loans allow us to expand our production capacity and to increase revenue”.
He also added that his company “prioritise having cash on hand to deal with emergencies or to take advantage of unexpected opportunities that present themselves. What is clear is that financing has helped grow the business, while still giving us the peace of mind knowing we maintain healthy cash balances.”
Leverage On Loans To Build Your Business
“Using leverage to make more money.”
To Vincent, taking a business loan is basically “using leverage to make more money”. Tan shares similar sentiments, sharing with us that for his business, “loans are a way to leverage on opportunities, provided we manage our risks properly.”
It’s clear that despite being in different industries, both of them share a similar business mindset when it comes to taking business loans.
At the end of the day, business services provided by banks are exactly what they are supposed to be – services that you can rely on to help support you in running a successful business.
A business loan is not going to be of much help in the long-term if you have a business model which is unable to deliver you profits. However, if you have been successful in building your business thus far and to expand more aggressively, a business loan could be the key to unlocking the next stage of your business growth.
This is where OCBC can help provide you with various types of business loans that you can consider for your everyday business needs. With OCBC, online business loan application is fully automated, and successful applicants are notified within 15 minutes of their loan approval.
Need Financing Support During This Period?
From now till 31 March 2021, SMEs can enjoy extra financing support of up to $5 million through the Temporary Bridging Loan Programme.
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