Why loan is preferred path to grow business

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Why a loan might be the preferred path to growing your business

Why a loan might be the preferred path to growing your business

  • 1 January 2022
  • By OCBC Business Banking
  • 5 mins read

There is a variety of reasons why loans are vital for businesses, whether large, medium, or small.

The main purpose of running a business is to earn more money through real profit gain, and the best way to do that is normally by expanding the business. This is, of course, the main reason for taking up a business loan. To grow your business, optimise efficiency and thereby increase your profitability, you’re going to need money. An injection of additional funds to a business can be invested for advertising, to increase stock storage capacity, to purchase better production equipment, or invest in better technology to increase productivity. Any or all of these will certainly give the business (and its profitability) a boost.

Many entrepreneurs are under the impression that all debts are bad because of the interest payments involved. A common misconception is that it is better to expand using your own money rather than to borrow from a bank. This, however, is not entirely true. Using debt to fund your expansion can be less costly when seeking to grow your business as it potentially leads to better shareholder value or return on equity. Although there are risks involved in taking loans, the possibility of success leading to lucrative profit is ever present. The crucial aspect is to calculate and mitigate the risks involved. This will help to ensure that the increase in profit is considerably more than the total amount of interest accrued from the loan.

Why would a loan be a better option than other sources of funding?

The main advantage of taking up a business loan in comparison to other sources of financing, such as venture capital or investors, is that you do not lose equity or control of your company. Having an investor on board will strengthen your business’s financial support to help with the cash flow of your company; however, an investor may hold different beliefs and priorities from yours. Although an investor is motivated to see your company grow into a successful one, ultimately, the end goal is a return on their investment. They may hold high expectations, and heap pressure on business owners by placing significant demands on the company’s progress.

With partial equity in your business, investors have the power to curb your decision-making process and steer the company in a different direction than what you have planned. Should the business take a wrong turn, relationships with your investors may likely become strained. This is especially worrisome if your investors are your own friends and family.

When you forgo your independence to obtain financial support, you will ultimately need to take priorities of others into account. They may ultimately end up hurting, rather than helping, your business.

A loan can offer a safety net for rainy days

SMEs should consider applying for a business loan as a financial buffer against unexpected expenditure. Even if your business is cash-rich, having some back-up emergency funds is always advisable as a precautionary measure in the event of an unfortunate incident resulting in financial losses, which would require an injection of fresh funds to countermeasure the shortfall in cash flow.

For instance, a fire that results in damage and losses to inventory and property would likely necessitate extra funds to remedy the situation. Likewise, a firm could overestimate the budget required for a big project it has undertaken, which ends up compromising its cash flow due to bad or slow debt repayment. In such cases, a business loan can offer the working capital to maintain smooth day-to-day operations. In summary, a business loan can enable your business to consolidate itself after unexpected losses and continue growing towards long–term success.

Additionally, a loan offers funding for you to build trust and develop relationships in the financial sector, which can open up avenues for further business development down the road. When you repay your loans on time, you build trust with the your lenders by strengthening their confidence in you. As a result, more lucrative opportunities will be made available to you in the future. A stronger relationship with lenders will also empower you to borrow bigger loans as your business grows.

Is a business loan right for you?

It is undeniable that for a company to grow, a fresh injection of funds is useful. Yes, there are many sources of funding you may consider to kick start your business’s growth plan. However, if you want to maintain majority control of your business and make your own decisions in the way your company should grow, a loan would be the most viable option for you. Aside from providing a source of funding for growth, a loan can also offer a good buffer to help you tide through unexpected business expenses or losses. Essentially, a business loan may be right for you if you are looking for any of the above.

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The information provided herein is intended for general circulation and/or discussion purposes only. Before making any decision, please seek independent advice from professional advisors. No representation or warranty whatsoever in respect of any information provided herein is given by OCBC Bank and it should not be relied upon as such. OCBC Bank does not undertake any obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.


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