Congratulations, you qualified for your first business loan.
But if you thought that was the most challenging part, you are wrong. You are now about to start the most treacherous part of the whole business loan journey.
I mean, there is always something to spend money on - whether in business or your private life, cash is always welcome. Now with a whole bunch of money in your hands, it will be a battle to ensure that you put it to the best possible use and realize a healthy return on investment.
How you spend the loan funds depends on your business structure, the initial intention of the loan, and most of all, your commitment to spend the money to grow your business. That said, there are a few things to consider before you start digging into your newly acquired capital. You need to develop a concrete strategy to ensure that the money is spent wisely, efficiently, and effectively.
To do this, you will need to ask yourself two fundamental questions:
Don’t know where to start? Here are a few tips to help point you in the right direction.
Do not leave anything to chance - plan for every coin that came in from the lender. Making a concrete plan (and sticking to it) is the only way to ensure that the funds are spent effectively and last for as long as possible.
So, figure out what areas of your business would most benefit from the cash injection and can help increase your revenue generation. This depends on your general business situation and your current business position. One business could benefit most from purchasing more inventory, while another could benefit from putting in a significant amount to develop a concrete marketing strategy.
Studies show that most small businesses use their first loan to buy inventory and equipment. However, focus on what your business needs the most to level up.
Do not forget that the money will need to be paid back - and with interest. So have a plan in place on how to repay the loan. In fact, you should have developed this plan way before you got approved for the loan. For example, if you take a short-term business loan, you might need to make frequent payments, and you will need to have money available to do this.
The loan repayment schedule should be automated or at least included on your to-do schedule so that you do not miss a single payment. Missing a due date could increase the loan interest or attract penalties or worse still, harm your credit history.
Watch the business expenditure like a hawk. The best way to stay in control and keep a tight grip on the loan funds is to be very vigilant. Some businesses allow employees to make purchases without much control over what to spend. For example, some companies allow employees to make purchases below a certain amount without needing to seek approval.
This makes sense since employees can quickly purchase things to get their job done. However, if not careful, these small amounts can add up pretty quickly and knock your budget off its feet.
So, it is advisable to have better control over every coin. Require approval for all expenditures if necessary. This way, you will know when an expense is unnecessary or when to look for cheaper alternatives.
It is easy to feel like your business needs top-tier machines and equipment to keep up with the trends. You will be tempted to use the loan funds to buy the best tech equipment, but there is no guarantee that this is best for your business. In fact, new tech is no different from a new car - it quickly gets replaced by something more efficient and faster.
Don’t get me wrong. Sometimes a business needs a new top-tier tech to boost growth. But only spend on new expensive equipment if your business actually needs them. For example, if your business is online-based and needs the fastest network speed, it is okay to invest in top-tier networking components. Otherwise, you can function perfectly fine with older, cheaper networking components.
Suppose you are in the business of selling farm equipment. One day while outsourcing inventory for your business, you find a supplier selling car spare parts at a discounted price. What would you do? Do you buy them hoping to speculate in the market or for when you finally diversify?
Buying these spare parts doesn’t contribute to business growth. You should spend the loan funds only on expenses that directly contribute to the business revenue generation.
Depending on your lender and the type of loan you applied for, a complete business plan may have been one of the requirements in the approval process. If the approved amount is different from what was presented on the business plan, it is advisable to revise it to accommodate the changes.
Financial experts advise that you revise your business plan often - at least annually. And what other perfect time to edit it than when you receive additional capital. However, it is advisable to consult a professional when making such significant changes.
Knowing how to manage money properly is not a skill perfected by everybody - knowing which business expense to prioritise is not easy, especially for a new business owner.
So if you have any doubts, it is advisable to consult with an expert. They will help guide you on how to spend the loan for the growth of your business effectively.
From the above points, you can see that the most challenging part of getting a business loan is necessarily not getting approved. It is, in fact, ensuring that the funds are spent on activities that help grow the business.
But now that you know the areas to pay attention to, you are now ready to get that loan and get your business to the next level. Read this article on how business loans work in Kenya for more information on business loans.