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In the past few years, more and more financial directors have been thinking about the issue of transferring management accounting and reporting of their enterprise to IFRS or at least…

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When you need to take a loan to small business.

To take out a loan in the fire order to pay off financial problems, even if it succeeds, as a rule, does not solve financial problems, but only exacerbates them. Loan debt is added to all debts. And again, a frantic search for money to recover debts begins.

And only a small part of entrepreneurs considers credit not as a solution to the problem, but as a tool that helps the work of small businesses, helps to develop small businesses. They can take a loan only in order to earn money on it, to develop a business, to prevent late payments, to increase working capital.

Before taking a loan, an entrepreneur should think not only about the purpose of the loan, but also its payback. Borrowed money should be used for business development, but only on condition that these loans are profitable.

How to develop a business – on your own money or take a loan.
In the post-Soviet space, quite often I have heard the opinions of many small businessmen that there is no need to contact banks. “Bankers are cashing in on us”, “The bank is always looking for its own profit”, “You can’t get into bank bondage” and. etc. Naturally, the bank profits, naturally, the bank does everything to its advantage. This is natural for any business. And you need to be an idiot, not a businessman, to do the opposite.

But small businesses should and can use banks to their advantage. Especially if the business wants to grow and grow. Let’s look at a simple example of two ways to develop a small business.

Imagine a completely abstract business for the production of a product. Moreover, the numbers to simplify the example we take completely arbitrary.

So, a businessman invested 1,000,000 cu to open a business (some conventional monetary units).

This allowed him to produce and sell a product demanded by the market with an annual turnover of $ 2,000,000. with an average annual net profit of 25%. That is, in a year he received 500,000 cu arrived. To simplify, we consider this profit to be final. He spent half of his profit on himself in the form of dividends, and the second he spent on business development (250,000 cu).

Business development at own expense.
After conducting marketing research, the businessman was convinced of the demand for his product in the market, in the growth of demand for it. And he decides to expand his business and double the output of the product, i.e. to bring the turnover to 4,000,000 cu

But for this he needs to invest $ 1,000,000 in business expansion He decides to do this at the expense of his hard-earned money and not bow to the bank.

In order to collect the necessary million, he must spend 4 years and invest all the profit accumulated during this time.

And if you take a loan from a bank?
Well, now we’ll analyze the second way – to take a bank loan for business development.

For example, a bank is ready to give a loan in the required amount (1,000,000 cu) for a period of one year at 20%. Immediately make a reservation that the interest is very high, even by today’s post-Soviet standards. Today in many countries you can get a loan at 3-5%.

What do we get.

Having received the required amount, a small business can, without wasting time, realize its plans. At the same time, he must return to the bank the amount of 1200000 cu (including interest). With uniform monthly payments – 100,000 cu per month. For a profitable business, this will not be any difficulty.

As you can see, in this case there are a lot of positive results.

Reduced the period of additional product release by 4 years. I note that 4 years on the market is a huge time. During this time, anything can happen – new players may appear, new products may appear, the need for this product may disappear altogether.

Well, the real gain expressed in money. 4 years, the business receives an additional profit of $ 500,000 * 4 = 2,000,000 cu This is at a cost of 200,000 cu

I repeat, I gave a purely hypothetical example, with all possible simplifications. In real life, everything is much more complicated. In the article, I wrote that I always developed my businesses with the help of banks, and not at the expense of business funds. And never repented of it.

Before you take a loan, carefully calculate everything.
As I wrote above, a bank loan can be a good tool for business development. But the tool must be skillfully used. Otherwise, it will be either useless or may injure the owner. Therefore, before you take a loan from a bank for the development of small business, you need to carefully weigh, analyze and calculate everything.

Have a clear plan for the development and expansion of small businesses. Have a clear business development strategy. Many entrepreneurs make a very serious mistake, believing that customer growth will certainly lead to higher profits. This is far from always the case. And I will write about this in the near future.

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