Can Larger Loans help Small Firms Grow?
Small businesses have become an important part of the world’s economy. According to the Small Business Association, more than half of the world’s working population (57.3 percent) is employed by small to medium-sized enterprises. This makes them integral to the growth of many countries. One of the issues that small businesses are often faced with is a lack of access to larger loan amounts which they can use to grow and expand their business. So, the question is, can larger loans really help small firms grow?
The Benefits of Larger Loans for Small Businesses
Smaller loans offered to small businesses typically provide less than $50,000. These are sufficient to cover day-to-day costs such as taxes and payroll, or to purchase small pieces of equipment. However, in order to expand and grow, small businesses need larger loans to obtain facilities, hire new staff, and invest in new technologies, among other things.
Here are just some of the benefits that larger loans can provide to small firms:
• Access to Expanded Resources: By obtaining larger loans, small businesses now have the ability to access expanded resources like new technology and equipment, allowing them to stay competitive in the changing business environment.
• Expansion Possibilities: Larger loans provide businesses with the means to expand operations. This means more customers, employees, and enhanced efficiency within the firm.
• Stability: Without access to larger loans, many small businesses have faced hardships due to insufficient capital. Although it’s difficult to pay back loans of this size, having access to a larger amount of capital can provide the necessary stability to help them grow their business.
• Increased Revenue: Having the funds to expand their business can lead to an increase in revenue. This in turn can be used to pay off the loan in the long term.
Risks Involved With Taking Larger Loans
Taking loans to grow your business is not without a certain amount of risk. Some of the risks involved in taking larger loans include:
• Interest Rate Increase: The interest rate on a loan is dependent on market conditions. As the market fluctuates, so does the interest rate. This means that rates could increase, greatly increasing the amount you have to repay.
• Loan Refusal: Banks may refuse to approve a loan if the small business owner does not demonstrate the ability to repay the loan. Without the necessary financial resources, your loan may be denied.
• Cash Flow Challenges: Taking larger loans means that more cash needs to be used to pay back the loan. This can cause cash flow problems and make it difficult to cover other expenses.
• High Risk of Default: A larger loan means a larger risk of default. If the business does not have the resources to pay back the loan, the lenders may decide to exercise the legal recourse of liquidating the assets of the firm.
Finding the Right Loan to Suit Your Needs
The key to finding the right loan for your business is to assess your needs and compare different loan options. Here are some tips to consider when selecting the right loan:
• Establish Your Funding Needs: Establish the amount of money you need and what you will use it for. This will allow you to select a loan that fits your specific needs.
• Compare Interest Rates: Compare the interest rates being offered by different lenders. Make sure that you look at the details such as any additional fees or charges.
• Research the Lender: Make sure that the lender you choose is reputable and has experience dealing with small to medium-sized businesses.
• Create a Repayment Plan: Once you have been approved for the loan, create a payment plan that suits your needs. This will ensure that you can pay back the loan in a timely manner.
Taking out larger loans can be beneficial to small firms as they provide access to resources and expansion possibilities. However, as with any loan, there are risks involved that should be taken into consideration before applying for a loan. By assessing your needs and researching the best available loan options, you can find the right loan to suit your needs.
