Bank Loan is a good opportunity because of low rates

When it’s time to grow for any business, there is an inevitable and almost philosophical question that comes up: debt or equity? What’s the most promising way to grow that will also entail the least amount of risk? As it turns out, expansion financing is about weighing many more variables than simply ‘risk’.

A bank loan vs a capital increase

So, it’s time to grow again, and, as a business, there are some growing pains. Enter: expansion financing, which is the means to be able to expand past current scale and operations. Business and corporations, as well as small-sized entrepreneurial operations, often debate the various avenues of cash flow that can be tapped into in order to be able to make moves that will help the company grow, such as hiring employees, upgrading technology and acquiring new departments. To do this, businesses could choose to look for external funding in the form of a bank loan, funneling some portion of their own private resources, or using factoring for financing. On the other hand, companies could choose to go for equity by looking for an investor, issuing new shares or raising the par value of its capital stock. Essentially, the question becomes one of principles and values: business leaders must ask themselves if they are of the mind to accrue debt through a bank loan, as part of their expansion plans, or if equity is what they’re more aligned with.

Why choose one over the other?

When it’s time to get scrappy and tighten belts — not to affect the bottom line, but to find sources of cash flow that will help the company move forward — a risk-averse entrepreneur might see the accumulation of debt through an external bank loan as a liability. But neither a capital increase nor a bank loan is inherently good or bad, beneficial or risky. The choice between the two comes down to the ‘why’ of the business, as well as what kind of business and industry it’s in, what stage of growth it’s at, and its current financials. A small clothing company, for example, might well opt for external funding through commercial loans or factoring due to a long receivable time being a natural part of its industry’s operating model. However, it still need a steady cash flow. Compare this situation to a publicly traded clothing company with global reach that can look to build equity through shares and partnerships with investors instead.

If bank funding is the way the company chooses to go, it can make the terms of the payments work in its favor and according to the nature of its business. In this case, loan agreements, while still representing a debt and liability, don’t have to be a bad thing. They can be a hassle-free way to expand and grow while still fulfilling one’s obligations to the lender.