SMEs take loans for various reasons; financial difficulties and inadequate cash flows, disruptions in the supply chain due to accidents and natural disasters, and periods of a slowdown in the economy affecting the revenue generating potential of the firms. However, it is also true that even large and successful companies take business loan because of the following reasons:
Speed-up growth rate and expand current operations: A successful and healthy business will always seek to speed-up its growth rate because of highly competitive market condition. Hence, these firms often utilize excess funding received through loans to increase the capacity (upgrading equipment, investing in marketing, or expanding working capital) for realizing their growth objectives.
Capitalize on business opportunities: Due to the dynamic business environment, unexpected opportunities may arise such as a discount on bulk orders, good deals on office furniture/ equipment auctioned off by banks, or forming partnerships/joint ventures in a project. Businesses will not only be able to fulfill their funding requirements through short-term/medium-term loans but also enhance their potentialof generating more revenues.
Enhance creditworthiness: When SMEs take loans, they establish a relationship in the financial sector and the confidence of the lenders is increased through timely repayments. Responsible debt financing enhances the firm’s creditworthiness due to high credit score and increases the chance of getting a higher amount of business loan in the future. The firms should take advantage of periods with high credit ratings as lenders will perceive lower risk and provide loans at lower interest rates.