4 reasons why small businesses need to take out loans

Almost a third of small businesses taking out alternative lender loans are doing so to cover a shortfall in cash flow.

When to dip into the loan market is a question all small businesses face from time to time.

Whether it’s to take advantage of a short-term opportunity for growth, a need to cover debts, or to buy new equipment to make life easier, all businesses need a helping hand from time to time.

We have previously covered the enormous growth of the alternative lending sector, with KPMG putting the annual growth rate of the sector from 2013 to 2015 at 281 percent.

With small businesses finding traditional bank loans difficult to access, the SME sector is taking advantage of the rise of the alternatives available.

While more small businesses may be availing themselves of loans from alternative lenders, why are they choosing to dip their toe in the loan market?

To cover cash flow

Analysis of loans made by alternative lender OnDeck* has found that 29 percent of applicants were aiming to take out a loan for ‘working capital’ reasons.

Anecdotally, the majority of ‘working capital’ applications are aimed squarely at stopping cash flow issues.

By and large cash flow headaches creates the need for short term capital, as small businesses struggle with inconsistent income and expenses.

For example, they may need to pay a supplier but find that their customers are paying them late.

In our own Business Monitor and SME Snapshot research, cash flow is repeatedly a huge pain point for small businesses.

However, the other three main reasons small businesses took out loans had less to do with crisis and have more to do with opportunity.

Inventory

About 22 percent of small businesses taking out a loan with OnDeck were doing so to boost their inventory at key times during the year.

For example, a retailer may be heading into the Christmas season and want to make sure they have everything in stock to boost revenue during the period of increased demand.

Businesses taking out loans to boost inventory is broadly a good sign, as the expectation on the business’ behalf is that they’ll sell adequate stock to be able to cover the loan (and then some).

Expansion

About 16 percent of businesses taking out a loan with OnDeck elected to do so in order to expand their business while the iron was hot.

We previously featured the story of Sydney-based Elyston Hayden, who elected to close his Sydney CBD hairdresser and move to the more rent-friendly Surry Hills.

While the initial move isn’t an expansion, he said it would reduce his overheads and have him in a better position to expand going forward.

“I want to hire more staff and expand the business, which is something I can do now that I don’t have to pay such high city rent,” he said.

However, without the capital provided by the loan he couldn’t get the wheels turning on the plan in the first place.

Equipment purchases

Finally, 15 percent of businesses taking on a loan with OnDeck chose to do so to purchase equipment.

New equipment can help make your life easier, whether it’s new IT systems or a new coffee machine to make a barista smile with joy.

It’s no surprise that new equipment is something small business owners can dream about, but getting the capital to make the purchase can be difficult.

Luckily MYOB Loans does offer loans for new equipment, and so it’s no surprise that this is high on the list.

 

MYOB Loans Powered by OnDeck offers loans of up to $150,000 to MYOB clients, with the average loan being $35,000.

Applying for a loan is easy. Funding in as fast as one business day. And terms are flexible. So if you need finance to help your business visit MYOB Loans.

Loans are issued by OnDeck Capital Australia Pty Ltd ABN 28 603 753 215. MYOB holds a 30 percent stake in OnDeck Australia and has a referral agreement under which it earns a commission on loans referred to OnDeck Australia.

*Statistics used in “4 reasons why small businesses need to take out loans” have been taken from On Deck Australia customer insights review, established August 21, 2016..