Advantages of 12-month business loans

business-lending

25

Jul

Advantages of 12-month business loans

posted by: Jason Hulott

Debt management is one of the most critically essential skills for business leaders to master to ensure the success of their enterprise.

As a science, debt management is not something that can be covered in any depth here! However, it is possible to make some general statements relating to debt and 12-month business loans.

Why debt is necessary

It’s important not to drift into considering debt as a great evil to be avoided at all cost because it’s often an essential and vital part of business life.

Debt is the inevitable consequence of, for example, buying something and not paying for it immediately. If you’re offered 30 days’ free credit by your suppliers, without cost, then the money for the item you have just purchased is sitting in your bank potentially earning you money.

The fact that you may have outstanding debt in the shape of your supplier’s invoice does not necessarily make the debt a bad thing.

In fact, borrowing and its associated debt might be the only viable way you have of obtaining the finance your business needs to grow and prosper. So having debt “on the books” is often far from bad, as it might easily indicate, for example, that your business is growing.

Borrowing

Significant borrowing though also brings with it its own management issues.

As a matter of reality, it is likely to be something that is costing you money in the form of either interest or related funding charges and fees. This can be something of a psychological worry for many SMEs.

Then there is also the question of how outstanding debts are seen by others examining the overall financial health of your business. The total amount of the debt carried by a company is sometimes referred to as its “debt profile”. If that profile is substantial and is seen to be extending over a very lengthy time period into the foreseeable future, then it may indicate that there are particular problems inherent in the business.

That situation may, for example, prove to be a powerful disincentive for potential investors and even some customers.

Using debt

For many businesses, the above realities of life lead to a number of important conclusions:

  • debt should be carefully and sparingly used for productive purposes;
  • it must be carefully managed to ensure that, in terms of its absolute magnitude and its duration over time, it does not start to become a powerful negative indicator in terms of the company’s viability. This is sometimes stated as the company needing to show that it can comfortably “service its debt profile”;
  • debt is something that should be got off the books as fast as is sensibly achievable.

These different factors explain the ongoing popularity of 12-month loans for businesses.

Shorter-term loans

12-month loans may be viewed by external observers as something that is entirely manageable for the company concerned – and not an unsustainable and ongoing debt burden.

Psychologically for the business’s owners and leaders, it also represents an acceptable challenge in terms of avoiding having a lengthy on-going trail of debt repayments. At the same time, if all other things are equal, shorter-term debt such as 12 month loans are likely to be more cost-effective than those going out over 24 or 36 months etc.

For all these reasons, 12-month business loans are likely to continue to be popular in the foreseeable future.