Small business loans can help your company grow… at a price. Discover why that price may be worth it for your business.
When you find that your business’ financial situation has become a bit uncertain, you might feel compelled to seek external financing. Luckily, there are plenty of business lenders that can help you in this area. The process of borrowing money through various borrowing options, such as bank loans and online lenders, can provide essential support to small and medium-sized enterprises. From bank loans to online lenders, the number of options can be mind-boggling.
But that doesn’t mean business loans are for everyone. Each lender will have a set of requirements you’ll have to meet if you want to apply for a loan. What’s more, you may be in debt for quite some time. This means it might be a lot more challenging to get another loan the next time your business has a shortfall.
With those disadvantages out of the way, are business loans worth it?
Yes, but only if you have a good reason for taking one on. You must know why you need the funds and the likely outcome of getting hold of those funds.
To begin with, the return should be high enough for you to repay the loan with ease. Even then, it might not be worth the risk unless you can also use the loan to secure a corresponding boost in revenue and profits.
To help you figure out if you could benefit from a business loan, here are the most common reasons that may make external financing worth it:
Assessing Your Borrowing Needs
Before you dive into the business loan application process, it’s essential to take a close look at your business’s financial situation. Start by reviewing your financial records, including your balance sheet, profit and loss statement, and cash flow forecast. These documents will give you a clear picture of your business’s current financial health and help you identify exactly where funding is needed.
Next, consider how much you realistically need to borrow and how much you can afford to repay each month. Take into account your business’s credit rating, as this will influence the interest rate and loan terms you’re offered. A strong credit rating can help you secure better rates and more favourable terms, while a lower score may limit your options or increase the cost of borrowing.
By carefully assessing your borrowing needs, you can ensure that you’re applying for the right amount of funding—enough to support your business goals without overburdening your cash flow. This thoughtful approach will also help you manage repayments comfortably and avoid unnecessary financial stress down the line.
Types of Business Loans Available
When it comes to business loans in New Zealand, there are several options to choose from, each designed to meet different business needs. Term loans are a popular choice, providing a lump sum of money that you repay over a fixed period with regular repayments and a set interest rate. This type of loan is ideal for larger investments or long-term projects.
If you need more flexibility, a line of credit might be the answer. With this option, you have access to a pool of funds that you can draw on as needed, paying interest only on the amount you actually borrow. This can be especially useful for managing day-to-day expenses or unexpected costs.
Invoice financing is another solution, allowing you to borrow money against your outstanding invoices. This can provide a quick cash injection to help with cash flow while you wait for customers to pay.
In addition to traditional banks, other lenders such as online lenders and peer-to-peer platforms offer alternative business loan options. These lenders may have different eligibility criteria and can sometimes provide faster access to funds. It’s important to compare the various types of business loans, interest rates, and repayment terms to find the best fit for your business.
Reason #1 – Expanding Your Physical Location
Let’s say that you’re ready to bring more staff into your office. Or maybe you run a coffee shop that’s filling up every day, so you want to have more space for your customers. That’s great, you’re ready to expand! Established businesses often find it easier to secure financing for expansion due to their financial track record.
But do you have the cash you need to do it? If you don’t, applying for business credit may be in order.
Generally speaking, this would call for a financial product with a long-term payoff. Before you make this commitment, though, you must plan ahead. For a growing business, it’s important to focus on expanding your customer base to support the investment and demonstrate business potential.
How much more money will you be able to make after the expansion? Are there any future threats to your revenue or cash flow? These are only some of the questions you must answer. After that, figure out how much you can easily afford to repay each month. Be sure to compare loan offers to ensure you get the best deal for your expansion.
Reason #2 – Building Up Credit Score
Many small businesses struggle to get an adequate loan. While they might make it through the application process, they’re only able to borrow a small amount.
This might be because they have problems proving that they’re a reliable borrower. More specifically, they might not have a strong-enough credit history.
The good news is that there’s a clever tactic for fixing this…
You take out smaller short-term loans that you can easily repay. You don’t even have to spend the money. Some lenders may require a personal guarantee when offering small loans to businesses with limited credit history. Just take out a small loan and make the monthly or fortnightly loan payment. Make sure each repayment amount is paid on time to build a positive credit history. Your lender will report your prompt payments to the credit bureaus, which will improve your score.
Ideally, this is something you should do long before you actually need a big loan. It’s a great way to build up a good credit history before setting your sights on larger loans.
Besides, this tactic can help you develop a good relationship with your lender. Once you’ve proved yourself reliable, they ought to be more willing to offer loans with higher amounts and better terms.
Reason #3 – Buying More Inventory
Categorised as assets on the balance sheet, inventory is a major investment for retail and manufacturing businesses. To keep everything running smoothly, you must ensure that your business is well-stocked. Existing businesses often need to demonstrate financial stability, including proper documentation of debts and assets, when applying for inventory financing.
This can sometimes prove difficult if you run into a shortfall elsewhere. You might run into a situation where you don’t collect money upfront for your goods. If you offer payment terms, for example, you still have to pay for the raw materials or stock for future sales first.
For a retail business, you may have an opportunity to buy in bulk and lower your cost basis. The only problem is, you need more money for that. Similarly, you might want to stock up in anticipation of a rise in demand. This is exactly why Kevin took out a business loan.
Kevin runs a wholesale and retail butcher shop. With the holidays approaching, he wanted to make sure he wouldn’t run out of stock. For that, he needed to borrow additional funds.
However, the bank rejected his application. This is common, as banks often have tight lending standards.
Luckily, Kevin found another avenue. His accountant suggested that he look for a non-bank lender. Some business owners turn to unsecured loans from online or alternative lenders as an option when traditional bank financing is unavailable. Kevin applied for a loan and received the funds in good time. Within 24 hours, the money was in his account and he could buy the stock he needed. Managing debts responsibly is crucial for maintaining access to future financing and demonstrating creditworthiness to lenders.
There are many available options if your business ever needs outside financing. You’ve just got to choose one that works.
Reason #4 – The Opening of a Sudden Opportunity
Once in a while, you may stumble upon a great opportunity. This could apply to both new businesses looking to launch and established companies seeking to expand. But you probably won’t be able to finance it in-house every time.
Rather than allowing that lucrative opportunity to slip through your fingers, you can take out a small business loan or a new loan to fund whatever needs funding, whether you are starting a new business or growing an existing one.
You do need to be extremely careful with this. Be realistic in predicting what you’ll get from the opportunity. Consider whether to use your own money or borrow funds with a new loan, as this decision can impact your loan approval and financial stability. The potential reward should be attainable and ideally far exceed the cost of the loan. If the opportunity does not pay off, you could face financial difficulties, including challenges in repaying the loan.
Some loans may have a fixed term, charge an early repayment fee if you pay off the loan early, or come with higher interest rates, especially for unsecured options. Making lump sums payments can reduce the total interest paid, but check your loan terms to avoid unexpected fees.
Understanding Loan Security and Repayments
When applying for a business loan, understanding the security and repayment terms is crucial. Most small business loans require some form of security, such as commercial property or personal assets, to protect the lender in case of default. This means you may need to provide collateral, which could be at risk if you’re unable to meet your repayment obligations.
Repayment terms can vary widely depending on the lender and the type of loan. Some business loans offer fixed interest rates and set repayment amounts, making it easier to budget each month. Others may have variable interest rates, which can cause your repayments to fluctuate over time. Be sure to check for any early repayment fees or penalties, as these can affect your overall loan cost if you decide to pay off your loan faster.
It’s also important to consider how the loan will impact your business’s cash flow and your personal credit rating. Missing repayments can harm both your business and personal credit, making it harder to access funding in the future. Always review the loan terms carefully and make sure you’re comfortable with the repayment schedule before committing.
Managing Cash Flow with a Business Loan
A business loan can be a valuable tool for managing cash flow, especially for small businesses facing seasonal fluctuations or unexpected expenses. By using a cash flow forecast, you can predict your business’s income and outgoings, helping you plan how to use the loan funds most effectively.
When considering a business loan, pay close attention to the interest rate and repayment terms, as these will directly impact your cash flow. Make sure the repayments fit comfortably within your budget, so you don’t put your business under unnecessary financial strain.
Strategically using loan funds can help you invest in new equipment, hire additional staff, or expand your operations, all of which can strengthen your financial position and support long-term growth. However, it’s important not to overextend your borrowing—only take on as much debt as your business can reasonably manage. With careful planning and disciplined cash flow management, a business loan can help your business thrive and reach its full potential.
Plan Ahead
At the end of the day, there are many situations where you could use a cash injection. Fortunately, there are also a wealth of options to explore. From credit cards to long-term loans of all sizes, there’s a loan product that can meet your needs. A wide range of business lending options are available to support different business needs, including quick access to funds, various loan types, and solutions designed to help manage cash flow and support business growth.
The most important thing to remember is to always crunch the numbers. The consequences of defaulting on a loan are too grave to leave anything to chance. Gather all the important numbers, weigh the pros and cons, and make a well-reasoned decision.
If you’re ready to take out a loan, Unsecured Finance New Zealand can help. We offer online application and quick approval, often in less than 24 hours. To learn more and see if you qualify, visit our website
