Opportunity cost is a phrase used in economics to describe the value of alternative choices. For example, let’s say you chose to eat in an upscale resto instead of a hawker centre. You paid $20 for lunch when you could have spent only $2 in a hawker centre. In this situation, you could have saved $18. Thus, the opportunity cost of eating in a fancy resto is losing $18 in savings.
Opportunity costs exist with every financial decision you make, especially in business. The good news is you can minimise these costs by using loans from an authorised money lender in Singapore.
Here are two opportunity costs that loans can help you avoid if you have a business.
Losing out on opportunities to earn more profits
Imagine you have a small ice cream store with one ice cream machine. The business turns in a daily profit of $100. You want to expand, especially because you project that you can triple your profits once you acquire another machine.
However, you can’t afford another ice cream machine yet with the money you have. So you decide against purchasing an additional machine. With that, you give up an extra $200 per day– this is the opportunity cost of your business decision.
What if you take out a business loan instead and buy the additional ice cream machine? That means you can make that extra $200 per day, elevating your total daily profits to $300. You can then use part of those profits to pay down the loan. Once you have fully paid it off, your new ice cream machine will continue to earn money. With it, you actively avoid the $200 opportunity cost every single day.
This principle applies to any business loan you take out to expand your operations. If you want to open a new branch of your ice cream store, you can also take out a loan to set up the new store. The profits earned by the new branch will eventually pay off the loan, and your business will keep on earning more money as long as the new branch is open.
Lacking cash on hand for salaries and other immediate payables
Running out of cash in key moments is never a good idea. Suppose that it’s payday, but you realise that you have used up all of your cash for other payables and have nothing left to pay your staff. That would make for awkward (or even angry) conversations with your staff. Some might even quit.
On the other hand, had you taken out a loan to take care of some of your payables, you could have had money to pay your staff on time. You could have avoided the opportunity costs of delayed salaries and resigning staff.
Also, your business may go through ‘dry seasons’ where you don’t earn too much revenue. With less money, you may face trouble in paying rent, staff salaries, utility bills, and other business expenditures. In these situations, taking out a business loan is a big help. You will avoid the opportunity cost of stopping operations, or worse, closing down the business altogether.
Cash reserves are extremely important if you want to run your business smoothly. To keep a significant reserve of cash at the ready any time you may need it, business loans can definitely help.
Opportunity costs exist with every financial decision you make. If you have a business, these costs can be especially significant. For this reason, it is wise to take out loans from an authorised money lender in Singapore. This way, your business can either expand and keep cash reserves at all times.