Small and medium-sized businesses drive the economy across Europe. According to the data of the European Investment Bank (EIB), small and medium-sized businesses account for 99% of businesses in European Union and employ two thirds of the labor force. Thus, small business financing has always been a priority for various financial institutions or at least it should have been.
Many entrepreneurs in the Baltic States still face deep-rooted fear of borrowing and the idea that borrowing reduces the credibility of the business. However, contemporary entrepreneurs challenge the status quo and understand that debt is essential in order to grow a company. Therefore, today we will share 5 key reasons why businesses (should) borrow additional capital.
Seed capital (to start a new business)
Ingenious idea is rarely enough to establish a successful business. A company can grow when there is a developed concept to show, whether it is a product or a service. However, it is often difficult to get to such point as it might require specific tools, technology, office or manufacturing premises, website, communication devices and other things for which a significant starting capital is needed.
Additional working capital
In order to earn profit, you need to invest working capital first. When company is growing quickly, there is a need for more employees, tools, office or manufacturing space, therefore, more capital. Usually businesses have three main ways to get additional capital – more equity capital from shareholders, profit from operations, and debt. Quite often shareholders pour most of their money into business to kick it off in the beginning and do not have additional capital for further funding. Lots of companies are not even profitable for the first couple of years. Therefore, company should consider taking on debt to grow the company as long as this debt is healthy.
Purchase of long-term assets
Long-term assets like buildings, land plots, machinery are usualy important to successful growth and expansion of ther company. Businesses often purchase such assets using leverage from lending companies in order to save working capital for operations.
Businesses constantly juggle between accounting credit and debit. Working capital is like blood that keeps the company going. Nowadays, there is tendency that once products are are delivered to the buyer, payment might be delayed for up to three months. Expanding businesses cannot wait so long without additional capital injection to move forward. Therefore, invoice financing solutions are getting more and more popular among small growing businesses.
Terms and condition for loans today are not like they used to be 5 years ago. Sometimes interest rate or other conditions might worsen, however, if they become more attractive, it might be wise to refinance existing loan and get better terms. This solution helps businesses save a lot of money that can be used elsewhere.
Businesses should not be afraid of debt. On the contrary, when company borrows responsibly it can achieve sustainable growth and expand to new markets which would be unreachable otherwise.