A case of ‘Two birds in hand is better than one in hand or, most certainly, two in the bush,’ where extra money in a company’s coffers is an advantage. And when exploited wisely, can do much good for the business for the present as well as for the future, even in such current difficult times!
All too often we think of situations where a company is in financial difficulties as a result of cash flow issues as a time when an extra injection of funds would help the situation or make a difference. Or when there is a shortage of cash as a result of various factors such as poor planning or unexpected expenditure, that’s when a timely influx of money would solve a lot of problems. But have you considered a firm that has strong financial fundamentals or is in a strong cash position still taking a business loan? Interestingly, there are plenty of situations in business where this happens and with good reason or reasons too. You might be thinking of some reasons why a company shouldn’t take a business loan when it is financially healthy but here are my reasons why I believe they can and should.
1) When companies want more options for future growth
When a firm says, it doesn’t need extra money because it already has enough money or too much money doesn’t signify such a good situation nor does it reflect reality. Because when you think of it, high levels of funds on the balance sheet signals the question why the money is not put to use? It could mean that the management of the company has run out of ideas and schemes or investment opportunities, or is too short-sighted and do not know what to do with the cash. So in fact, if a company is doing well it should still need more money for growth. Money begets money; money attracts money. And the growth of a company requires more money.
Therefore a company that even has a strong cash position and is growing will certainly need more and more money as it increases the number of clients, takes on more and bigger projects, and buys more equipment and inventory, etc. It is normal if not necessary for a company to always want more cash for it is a rule of thumb that companies should want to grow. This situation, in turn, brings in more potential profit which translates to more money and that is the name of the game in business. And in the case of accelerated growth than it doesn’t hurt to have accelerated amounts of cash coming into back the growth.
In some cases, companies with a strong financial position might still want to release the restriction on cash flow by taking a business loan that will free the money they have already, allocated for particular purposes, for other bigger and more lucrative plans.
2) For cash protection against tough times
Having an extra backup of money even though a company is cash rich is always prudent if not a good idea. Anything can happen that could cause a business to suffer losses that would need an injection of funds to remedy for any cash shortfall caused by the losses. For example, a fire could destroy lots of inventory and property of a well to do company, and that would need lots of extra money to get the company back on track again. Or a firm overestimates its financial ability to follow through on a large project it has undertaken and jeopardizes their general cash flow. Or maybe in the case when a subcontractor faces dire financial problems from a large project they are undertaking because the main contractor is slow or not making payments due. All above 3 reasons that could cause financial problems could be remedied or even avoided if they had extra cash as a result of taking a business loan earlier just as an extra buffer against such eventualities.
3) When there is need to overcome cyclical business downturns
Different industries have different cyclical downturns, and each time a business downturn happens there is the necessity of reserve funds to finance the operations of a company during these periods. So when business results can slow down whether once or twice a year or once every few years it is wise for a company to strengthen further its strong cash position by taking a business loan. Take for example a restaurant chain; there may be a few of times in the year when business slows down, and revenues decline during these periods. But operating costs are still running so even when the business has a good cash position due to good business during good times, and the slow times could cause the depletion of accumulated funds of the restaurant chain over only a period of a short span of time. Therefore it doesn’t hurt to have extra cash on a business loan.
4) Investors look for secure cash positions of companies
Investors whether they being banks, private money lenders, peer to peer loans through crowdfunding organizations (click here for more info), government bodies and agencies or even the inner circle of friends and family will always look at the loan to others as a business investment. They lend the money with the intention of making a profit at the end of the day and certainly do not want a financial loss due to a bad debtor loan. Banks especially are in the business of managing risks and will not indiscriminately give financing to companies with a poor demonstration of loan repayment ability. The saying “A bank is a place that will lend you money if you can prove that you don’t need it” does apply here. Of which also means that the best time to ask for a business loan is when you can prove that you are financially strong, that business is good, and that you have good business plans for your company in the coming months or years. It is at these times that your credit rating will be highest and this may help bring in investments if not attract investors easily.
5) The interest of a business loan is usually less than the profit gain
Even though there are obvious risks in taking loans, just as there are risks in giving loans, but if the risks are calculated and mitigated to some degree, then the possibility of business success of a project could spell strong profit gains. Which means the profit increase could be substantially larger than the total amount of interest of the loan to be paid back over time. So this further adds to the wisdom and benefit of taking a business loan by companies already in a strong financial position. Henceforth the question here would be how much larger in amount is the ratio of the profit gain about the interest on the business loan and the risks taken.
6) Because capital-intensive companies may find difficulties in maintaining cash reserves
Companies such as heavy industries like manufacturers of machinery usually find it sometimes harder to preserve their cash reserves due to heavy spending on labour, machinery, and inventory. All these results in high investment and operating costs that could eat into their cash reserves even if these reserves are large. So quite often there are companies which do take up business loans for the above reason.
7) When there are expansion plans
The main if not sole reason for starting a business is to make a profit. Expansion helps firms meet that goal and is also one of the quickest ways. And the fastest way to achieve this expansion is for a company to take up a business loan. The funds from the business loan can be used to purchase more machinery and equipment, to set up more business premises, increase the workforce, buy more stocks, etc.
8) For seizing unexpected opportunities
Sometimes when an opportunity presents itself to buy something like machinery or property or even some company vehicles at a highly discounted or much lower than market price it is certainly advantageous for a business not only to have a strong cash position but also to maybe have extra cash. Examples: A company could get great deals buying vehicles or properties, in a foreclosure, auctioned off by banks. Or a business that is closing down could have its inventory bought over, at meager prices, by another company using extra money obtained from a business loan. This further emphasises my point that there are advantages for a company to add greater strength to an already strong cash position.
9) For building relationships
Furthermore, when a corporation borrows money through a business, it gives opportunities for the borrower to establish relationships in the financial sector. By building a lender’s confidence in the borrower’s ability to make repayments according to schedule, the borrower will increase his or their chances of getting bigger loans as the business grows larger in future.
10) Because of the many opportunities available to nowadays to take business loans
Besides the traditional lenders, there are other sources for extra funds that a company can tap into. Take Singaporean peer to peer (P2P) business loans that can nowadays be found on crowdfunding platforms on the internet. SMEs are finding in more recent times the benefits and advantages of borrowing from P2Ps which include more choices for getting business loans, faster and simpler procedures, convenience, no collateral is involved, and better interest rates than traditional lenders. A popular business loan mobile app now available that can link you can get up to S$100,000 in loans approved in 48 hours can be found when you click this link – http://bolt.fundingsocieties.com/ .
I believe unfortunately many companies fail to strengthen their financial position even further when they do not see or understand the wisdom of having added financial strength and do not make use of the many opportunities available nowadays to get a business loan from for this purpose. “Cash Is King,” “the person with money has the loudest voice” and “money makes more money.” These are some of the well-known business bylines I can think of in response to whether the thinking of having too much money or adding finances to an already strong financial position is not advantages.
Funding Societies has a Capital Market Services License issued by the Monetary Authority of Singapore. Capital Markets Services License No: CMS100572-1 issued by Monetary Authority of Singapore (2016)