For most companies, the word “debt” may bring up anxious, negative connotations. However, as in the words of Shakespeare, there is nothing either good or bad – but thinking makes it so. Debt, when used as a tool, can actually be beneficial to the borrower, offering the opportunity to expand and grow. Here are a few ways to leverage debt to your advantage.
Experience faster growth
It takes hours of work and dedication to get a business going. To continue improving profits – and maybe hire some extra help – you’ll inevitably require extra capital. One of the biggest advantages of acquiring a loan is that the money will help a business grow faster. Among many other things, a loan can help you purchase equipment, bring new people to the team, open a new location, or make certain seasonal adjustments.
According to Mark Perrault, a Northwestern Mutual financial advisor and co-owner of Dunn Perrault & Associates, “It’s a great time to leverage debt with a small business.” He affirms “Interest rates are low and the economy looks good.”
Of course, a loan should only be considered if your company has created a thorough business plan that details the uses of the money, its return on investment (ROI) and the repayment agreement. A few important questions to consider before applying for a loan include, “What is the estimated cost of borrowing?” “How many years will it take to pay off the debt?” “How much money does the business need?” and “What are my long-term goals?” As you weigh the cost of pursuing your next major financing decision, there are many financial planners that can help guide you through navigating the loan process.
The Small Business Association website is also a great resource for connecting with lenders. Most experts would recommend going through a local bank or credit union to determine which type of loan best matches your company, and with whom you can establish a close relationship. It always helps to know the individual who will put your loan package together, and who understands the unique needs of your business.
Maintain business ownership
When you take out a loan, while regular payments will need to be made to the lending institution, you’ll still retain full ownership (full equity) of the business. Throughout the duration of the loan you’ll also keep any profits earned from a growth in sales.
On the other hand, if you choose to finance growth by selling off part of your business to a partner – known as selling equity – someone else will gain advantage from your hard work. They’ll also get to have a say in your business for the rest of the foreseeable future. But if you take on debt, once it’s paid off, you’re home free.
Debt doesn’t lie
Also, when compared to equity, debt is less expensive in the long run and without any unexpected consequences. When a business offers equity in exchange for assistance, the value of those shares will vary as the value of the company fluctuates and grows. Over time if your business becomes more profitable, the equity you’ve parted with will cost much more than the initial value of the debt.
Build solid credit
A company’s credit history plays a significant role in its overall success, and its ability to continue obtaining funding. At first, many small businesses may find that they have trouble obtaining a line of credit from a bank because they lack a credit history.
If you cannot obtain funding from a bank, it’s worth it to consider a business credit card or a store-based credit line just to elevate your credit starting out. After you begin to establish yourself, you can continue to boost your company’s credit rating by making payments on time. Keeping your financial ducks in a row and never missing a payment will help increase your business credit spending limit and give you a better chance of lower interest rates on any future loans.
Claim tax deductions
The Internal Revenue Service generously offers tax relief for business owners who receive a loan. If a loan is only used for business purposes, entrepreneurs are able to deduct the interest paid on the loan. This unique opportunity to claim deductions could even be a reason to get excited about tax preparation this year!
Learn savvy money management skills
The decision to obtain a loan and make regular, timely payments has the side benefit of encouraging smart money management skills that can be applied to all aspects of running business. Taking on debt will require you to stay focused on the foundation of the business, and keep a pulse on any problems before they blow out of proportion. Always think about your upcoming bills, payroll needs, tax deadlines, etc – even one extra minute a day devoted to money-management can help you better master your business finances.
Because 99.95% of small businesses will never receive venture capital, understanding debt financing is critical to unlock growth. By taking a smart risk you can keep your small business’ momentum going and push for continued success.
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Written by
Beth Kotz
Beth Kotz is a contributing writer to Credit.com. She specializes in covering financial advice for female entrepreneurs, college students and recent graduates. She earned a BA in Communications and Media from DePaul University in Chicago, Illinois, where she continues to live and work.
