Small business owners need to know that not all debt is bad. Some schools of thought will tell them otherwise but there are occasions when business debt just makes sense.
If a small business owner wants to maximize their earning potential, they need to know how to recognize when acquiring debt is an appropriate strategy for their business operations. Before a business owner says “No” to debt altogether, ask them to consider the following points.
Not all debt is created equal.
The use of funds should be a factor in determining if debt is the right choice for the business.
Will the debt be used to acquire an income-generating asset? If so, what will be the impact on your bottom line? Does the return on investment outweigh the interest expense and associated costs of borrowing money?
Also, by acquiring this asset, are there potential tax benefits that will offset the cost of borrowing?
Paying Cash vs Borrowing.
Business owners may think that using cash to purchase business assets is a better solution than borrowing money. Their outlook may change after reading these points:
Let’s say the business’s cash is invested and earning a 15 percent rate of return. The financial institution is lending money at a rate of 8 percent. Is cashing out that investment the best use of the funds?
Why not consider using the bank’s money? If the investment is left in place, the owner will continue to make money on the spread and the cash will be preserved.
Cash is King.
Lenders are more likely to take a favorable view of a loan request if the applicant has strong cash reserves. (Bonus points if the applicant is willing to relocate the cash to the lender’s financial institution.)
Cash on hand in conjunction with a loan request is a powerful negotiating tool. Frequently, a business owner can negotiate a lower rate or reduced loan fees. Sometimes cash reserves can be the extra push that’s needed to turn a decline into an approval. Business owners shouldn’t wipe out one of their best bargaining tools.
Cash-secured business lending is an excellent way to establish business credit for start-up businesses with no business credit. Cash can be used to secure a business line of credit, business loan, business credit card, or all three.
Since the collateral is the cash, secured business requests are a slam-dunk for business owners. They’re cheap, fast, and without restrictions on the use of loan proceeds.
What You Should Do to Find Out If Debt is a Good Option
What are the next steps for business owners who want to know if debt is a viable consideration for their operations? Where can they find sound advice from an unbiased source?
Ideally, a business owner should seek the insight of someone who is familiar with their business operations, industry, current business needs, future growth plans, and the market they serve.
Outside resources like business coaches, CPAs, or fractional CFOs offer valuable insight for owners who are serious about their business strategy and what to know if debt makes sense.
Small business owners should include a discussion about debt in their strategic planning sessions. If they don’t, they may overlook a powerful tool that, when used in the right circumstances, could take their business to the next level.
-Courtesy Sara Hobbs, www.stewardshipadvisoryservices.com
