Updated: June 19, 2018
In personal finance, it might be in your best interest to avoid credit card debt, overdrafts, and cash advances because funding lifestyle expenses with debt will most likely land you in a financial mess. However, for a business owner, avoiding debt might look prudent but it doesn’t usually make financial sense.
Interestingly, irrespective of the quality of your products, services, operational efficiency, and management skills – a day will come when you’ll need more money that you have in the bank. This piece looks at three reasons debt could be a great business ally.
1. Debt helps you stay in control.
A business can need money at any time for a variety of reasons such as pursuing an expansion project, adding a new product category, or doing one of the hundreds of things that businesses need money to do. When a business has less money than it needs, most business owners automatically thinking about selling a part of their business to raise equity funding.
Getting funding by selling equity looks great on paper because you don’t have to worry about repaying a loan plus interest. However, selling equity means that you’ll be stuck with a business partner for the rest of your business life.
The business partner gets to share in the profit of the business despite the fact that you singlehandedly grew the business to the point of getting equity funding. More so, the equity partner might have other ideas for the company and you’ll start having boardroom fights when making business decisions.
2. Debt helps you to seize business opportunities.
Debt can make it easier for your business to pursue new business opportunities that could lead to profitable growth.
If you don’t have enough money to pursue a business opportunity, you can consider credit facilities instead of missing the business opportunity because you don’t have money. Of course, you’ll need to ensure that the return on investment (ROI) of the idea you want to pursue will be more that after-tax interest you’ll pay on the loan.
For instance, you might have an office cleaning service that has an opportunity to sign a $10,000 monthly contract with a potential client. The only problem is that you’ll need to buy $4,000 worth of supplies, equipment, labor and logistics.
You could either pass up the contract or look for a way to borrow the money needed to buy the supplies. If you get a $4000 loan with an after-tax interest of $500, you’ll be able to take up the contract, provide the required service, pay the loan, and still smile to the bank with $5,500.
3. Debts help you to take advantage of tomorrow’s profits.
Businesses all have periods when they must endure a lull in their cash flow because of variations in the supply and demand dynamics of their business.
A business loan can be your best ally if your business struggles with balancing uneven cash flows during the feast and famine cycle of your business. A loan can provide you with the money you need to buy inventory, fund payroll, and take care of maintenance during the quiet cycles when you normally won’t generate much revenue from sales.
However, as soon as the famine ends and the feasting begin; your business will be primed and ready to take on the surge in orders. Hence, you’ll find it easy to pay off the loan with interest and enjoy the rest of the feasting season.
Nonetheless, you’ll need to be diligent enough to make prompt and full payment of your debt and set some money aside for the next famine season.
This article was submitted by Ernest Raleigh.
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Thank for that useful information.
made some investments with a guaranteed return using money that I loaned. I took a two-year loan from a bank and invested on a business where my ROI is also two years.
It’s like making my money work for me.
Thanks for this Fitz.