Leverage and survival are the two basic reasons why companies have to take out business loans. A business line of credit (LOC) highlights how loans help companies expand and stay afloat. For instance, a LOC gives you the liquidity to buy in bulk for supplier discounts and meet payroll during slow months.
Niche industries such as bars and restaurants need the money to prepare for large parties or special events to take them to the next level. Term loans help companies buy new equipment to be more efficient or refinance outstanding loan to cut interest expense.
While there are many types of financing available; ROI is a common consideration for different business loans. You can increase the ROI of business financing with a few simple steps. Thankfully, calculating ROI does not require complex math. Knowing the payback period, interest rate and purpose of the loan helps you make informed decisions.
What is the ROI of your business loan? Contractors bidding for a job could use an online loan calculator to determine if using a LOC makes sense. As an example, how does the interest carry (interest expense) of taking out money to buy supplies and labor affect the net profit of a remodeling job? You can then decide if taking work that requires short term financing makes sense. Be sure to add in writeoffs for interest expense when calculating ROI.
Similarly, you should know if the discount paid on factoring or the premium on merchant loans is less than the revenue gained. A company should focus on high-profit margin receivables when using a factor. Selling A/R with a 30% margin for 90 cents on the dollar ensures a 20 percent margin on that receivable.
Do you consider the tax benefits of business loans? Cutting your tax burden is another indirect way to increase profits. Many businesses overlook writeoffs that reduce taxable income, which often requires the help of a CPA to identify. Interest expense from loans and depreciation expense on equipment are ways to boost the ROI of your business loans.
Interest costs from credit cards, LOCs and equipment loans could be writeoffs that boost your bottom line. Please keep mind that some non-traditional business loans do not qualify for tax deductible interest, such as merchant loans or A/R factoring.
Equipment loans may have two tax writeoffs that increase ROI. In addition to the interest expense, companies can depreciate new equipment over a useful life to lower taxable income. You should work with a CPA to review your capital equipment on an annual basis. In this way, a new pizza oven lowers production costs and has tax advantages compared to outdated models.
Do you consider the tax benefits buying new equipment ? A CPA will help you review the total return benefits of equipment loans.
How do you choose the best loan? Matching the correct loan structure to your needs is essential. Many entrepreneurs think of cash in a generic way and use whatever loans are available. You should first consider the loan purpose, repayment period and amount needed.
Utilities, repairs and payroll or repairs are short term needs that are best for revolving credit, such as credit cards or lines of credit. Unlike an installment loan, you only pay interest expense if using a credit card or LC.
Remember, banks prefer extending lines of credit and credit cards to companies before there is a need. Nearly all companies experience cash flow issues at some point. Be sure to have revolving credit before there is a need. Online lenders such as Business Loans Direct and Lending Club offer a large variety of loan options to review and consider.
Similar to other investments; you should evaluate business loans from a total return standpoint to make profitable choices.