Most businesses hold the idea that taking out a business loan is akin to going into debt. While this point isn’t necessarily incorrect, it doesn’t offer a complete view of what financing has to offer. The truth is debt that’s put to good use, like investments or other cost-effective outlets, can be advantageous to your business in more ways than one.
Despite the fact that taking out a loan entails committing to monthly payments, there are scenarios where business financing actually works to reduce your costs. It may seem counterintuitive at first, but a business loan can offer a way to save – both in the long run and short run.
This guide will go over the top six ways a business loan could help you to reduce your costs – as well as other possible benefits of borrowing for your business.
U.S. inflation reached a 40-year high of 9.1% in June 2022. Although rising prices have eased slightly since then, inflation continues to pose one of the biggest concerns for small businesses.
According to the Q2 2022 Small Business Growth Index Report, 38% of small business owners declared inflation as the most significant risk they were facing.
Inflation affects everything from operating costs to dampening consumer demand. For many businesses, however, one of the areas where inflation is felt the most is in rising supply costs.
Companies are struggling to pay for the inputs they need to create products, serve customers, and even take on contract jobs.
Many businesses have sought out business loans as a way to manage inflation-related issues,
Financing offers the influx of capital needed to enable businesses to secure materials, supplies, enter into binding agreements, and more – before prices increase even further.
With financing, construction companies and manufacturing firms are able to purchase needed materials in advance without having to wait for prices to increase down the line. Other businesses have taken advantage of this model as well. Borrowing to cover expenses upfront, before prices rise, is one-way businesses can stay ahead of the curve.
Businesses struggling with high-interest-rate debt may be able to save and/or cut down their monthly payments by refinancing. Refinancing entails taking out a new business loan and using the proceeds to pay off existing debt.
With refinancing, you may be able to reduce the total costs of interest over the lifetime of your existing loan. In other cases, businesses opt for refinancing to lower their monthly payments or secure less frequent payments.
Ideally, the new business loan should feature more favorable terms, such as lower interest rates, lower monthly payments, or a longer repayment period. In order to obtain more favorable terms on a new loan, it helps if you’ve made progress in various qualification areas.
Businesses may be able to receive lower interest rates if they can show that they’ve significantly improved their credit score since initially obtaining financing. Greater revenue, longer time in business, a stronger balance sheet, and even introducing collateral can all help companies gain more favorable loans.
Small Business Administration (SBA) loans are one of the most popular options for business loan refinancing. These loans feature some of the lowest rates on the market, but they also come with strict eligibility criteria for credit score, annual income, and more.
Buy in bulk
Businesses that rely on heaps of inventory or raw materials may be able to gain considerable savings when making purchases in bulk. Unfortunately, all too often, the companies that would benefit the most from volume purchases are also pinned down by cash flow difficulties.
Business loans provide the funds needed to take advantage of volume discounts. You can use them to stock up on high-demand inventory or much-needed supplies and materials to keep your business operating smoothly while cutting down costs.
And, as previously mentioned, buying in bulk upfront, in anticipation of rising prices, can also result in savings.
Today’s businesses are laden with inefficiencies that all too often translate into additional costs. Research from IDC points to inefficiency costs cutting anywhere from 20% to 30% of company revenue annually.
Manual processes, in particular, are a major culprit. Everything from duplicate data entry to inadequate risk assessments and disorganized customer information can eat into your profits.
Addressing back-office inefficiencies requires an upfront investment – something that business loans help with. The most straightforward way to use a business loan to optimize operations is by purchasing technology tools, especially those that replace manual processes and integrate various aspects of your business.
One such example is customer relationship management (CRM) softwares. Although pricey at first, this technology system can help improve a number of business functions, from sales to customer service. It also helps to integrate and optimize customer and lead data, enabling your employees to obtain a 360 view of your contacts.
Businesses in various industries, including professional services, B2B, manufacturing, and more, can see reduced costs over time by incorporating a CRM or similar technology systems.
Equipment or real estate purchases
Purchasing major fixed assets, like business equipment or real estate, allows your business to build up equity and generate significant value in the long run.
Businesses can reduce the long-term costs associated with operating machinery by opting for financing instead of leasing. Unlike a leasing agreement, which must be continuously replaced, businesses with equipment loans are able to maintain their machinery without making additional payments once the term limit on their loan ends.
Plus, if a business decides to go for upgrades or a replacement, it can always sell the equipment at market value and retrieve a portion of invested equity in return.
Purchasing real estate with a business loan follows a similar model. By financing real estate, businesses may be able to cut down on rental payments and build equity in an appreciating asset. Real estate investments may even generate rental income by taking on other businesses as tenants in spaces not occupied by the borrower.
SBA loans are a popular way to finance both equipment and real estate. In the case of the latter, businesses must occupy at least 51% of the property they are financing.
Businesses looking to reduce their tax bill at the end of the year will be eager to learn that taking out a business loan can potentially result in significant tax deductions.
So long as you’re using the proceeds from a loan for business purposes, you may be able to deduct all of your interest payments within a given year. This can help lower your tax bracket and possibly reduce your cut costs in the short term.
If you do decide to take advantage of business loan interest tax deductions, there are a few specifications to be aware of. For starters, you must have borrowed the funds from a legitimate lender. Family and friends are not recognized by the IRS, and you can’t claim deductions if you go this route.
It’s also important for your business to show that it has spent the proceeds from the loan. If the funds aren’t actually in use and are sitting in a bank account, your business won’t be able to claim loan interest tax deductions.
Additional reasons for taking out business loans
There are scenarios where a business loan may be able to help you reduce your costs. However, that’s hardly the only benefit of borrowing. Business loans offer a multitude of other advantages as well. Take a look at some of the most common reasons businesses borrow.
Reduce personal risks
All too often, business owners fall back on their own savings and dip into their pockets to cover business expenses. Although this strategy is fast and eliminates borrowing costs, it could ultimately expose entrepreneurs to unnecessary risks.
It’s wiser to keep your personal and business finances separate, and relying on a business loan when you need cash is one way to accomplish this.
Financing is one of the most important ways for businesses to reach their growth potential. By investing in new locations, new ideas, or new products, business loans make it possible to pursue growth plans that would otherwise be inconceivable.
Acquire existing businesses
Many small businesses expand by acquiring competitors in their field. This is true for healthcare practices, law firms, and many other industries. Financing provides companies with the capital they need to jump on an opportunity to lock in a new customer base.
It’s not uncommon for cash flow difficulties to arise from time to time. When this happens, it can become challenging to meet basic expenses, such as utilities, payroll, and other payments.
Business financing is one solution to cover short-term capital needs that can make a significant difference in helping your business remain operational.
Hire new employees
In today’s tight labor market, it’s becoming increasingly difficult to find and hire qualified talent. In order to secure the right candidate, small businesses must compete with larger firms in terms of wages and employee benefits. Business loans provide the necessary capital to hire workers now, so you can meet your growth goals later on.
What to know about taking out a business loan
Business loans can make a substantial impact on your growth potential. There are even multiple scenarios where financing can help you cut costs, either in the short run or down the line.
In order to anticipate how a business loan can really help you save, you’ll need to compare various aspects of your expenses alongside the costs of borrowing. To do this, you’ll need to have an understanding of the types of business loans you qualify for.
National Business Capital, a leading B2B financing marketplace, matches you with personalized financing solutions in seconds. Plus, our leading business financing experts work with you to understand your financing goals and help you choose the right loan.
Get in touch with National Business Capital to learn how a business loan can help you cut down your costs!