Cash flow is always a concern for businesses, irrespective of size. Despite earmarked funds, it becomes impossible for companies to pay for large expenses upfront, whether it is buying a space or equipment. For the sake of day-to-day business expenses, entrepreneurs tend to borrow money. The question is whether you should borrow money to grow your business. The answer is not straightaway yes or no.

When you have just started your business, you might need to rely on startup business loans with no guarantor. These unsecured loans will let you raise capital for your business. However, bear in mind that these loans will charge high interest rates. The good thing is that monthly payments will remain unchanged, so you can align with your business budget.

It is a good idea to take out a business loan as a startup when:

• You are completely competent to discharge the debt on time.
• You know that raised funds will help increase your business revenues.
• You do not have any other ways to arrange funds.

Is it worth taking out a business loan for an established business?

Business loans are also aimed at established businesses. Of course, it makes sense to borrow money when your business needs it to grow. Experts suggest that you consider borrowing money only when:

• You are completely confident about your repayment capacity.
• Compare all funding options before borrowing. It is likely that other alternatives are cheaper than business loans.
• Make sure that the debt payments will not add pressure on cash flow.

Types of business loans that you can consider

The following are the types of business loans that you can consider for the growth of your business:

Unsecured business loans

• Unsecured business loans will let you borrow up to £20,000.
• You will pay down the debt in fixed instalments over an extended period.  
• They are useful for funding small expenses.

Secured business loans

• Secured business loans will let you borrow up to £500,000.
• Secured business loans charge lower interest rates than unsecured business loans.
• They are subject to collateral. If you fail to repay the debt, you will lose the collateral.

Business credit cards

• Business credit cards work for meeting small emergency expenses.
• They are paid off in one fell swoop after the bill is generated.
• Business credit cards might prove to be slightly expensive.

Merchant cash advance

• A merchant cash advance is appropriate for businesses that sell goods on credit.
• It is not a loan because you borrow against the projected debit and credit card sales.
• You will pay up to a pre-agreed fixed percentage of your everyday sales, which is 10% to 20%.

A business line of credit

• It is similar to a business credit card. It enables you to borrow up to the given limit.
• You can pay down the borrowed sum as and when you want. You will pay down interest only on the unpaid balance.
• If you have paid back half of the borrowed sum, you become eligible to borrow it again.

Business loans are not always worthwhile

Just because various types of funding alternatives are available for your business, it does not mean that you will always turn to them whenever you need cash. Sometimes, it is not a good idea to take out a business loan.

• Your cash flow problems are not temporary. Inconsistent cash flow and erratic revenue streams will make it harder for your business to repay the debt.
• Your business revenues are on the decline. Business loans will be quite challenging to settle on time.
• Your debt-to-income ratio is high. You will end up crippling your financial situation.
• Your business does not show consistent profitability growth. Experts do not consider it an ideal time to use external funding sources.
• You are using long-term business loans to meet operational overheads.
• You often use short-term business loans to cover day-to-day expenses. This hints at cash flow disruptions.

How can you ensure more cash inflow?

Even if you are certain about your repayment capacity, you do not need to rush to apply for business loans, credit cards and a line of credit. First, you should carefully examine whether your business has enough cash inflow. You should create room for a better and smoother flow of cash.

• Get paid faster from your customers. Reduce the billing cycle so you are paid before you have to pay your creditors.
• Try offering early payment discounts 1% and 2%. This will encourage your customers to pay you back before time.
• Contact your suppliers if they are willing to offer you an extended repayment term. This will allow you to retain some cash.
• Review your prices. Inflation has been rapidly rising. Make sure that prices corroborate with it. You will need to revise prices from time to time. If you keep charging old prices, you will end up losing profits. Your cash flow will also be disrupted.
• Try cutting worthless discounts. Set a minimum order policy to protect your margins. Charge nominal platform fees if you accept orders from your customers online.
• Rethink about incentive schemes, bonuses and other monetary rewards.
• If possible, ask your employees to work from home. This will save money on rent and utilities.
• Be mindful while buying inventory. Buy stock only when needed. Keeping it idle for months will never help you except to block your cash.
• Refinance expensive business loans. This will help you qualify for lower interest rates.

The bottom line

There is nothing wrong with taking out a business loan, whether you are a startup or an established business, but you should ensure that you are not using them due to inconsistent cash flows and profitability.

Business loans are ideal when you need to fund temporary gaps in cash flow or to spread the cost of a large purchase. Assess your repayment capacity before deciding on business loans.