When Business Debt Makes Sense

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 financial 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 these 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. Before turning their back on debt, small business owners should ask themselves these questions:

1. Will the debt be used to acquire an income-generating asset?
2. 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?
3. By acquiring this asset, are there potential tax benefits that will offset the cost of 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:

1. Let’s say the business cash is invested and earning a 15% rate of return. The financial institution is lending money at an 8% rate. Is cashing out that investment the best use of 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.
2. 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.)
3. Cash on hand in conjunction with a loan request is a powerful negotiating tool. Oftentimes a business owner can negotiate a lower rate or reduced loan fees. Sometimes cash reserves can be the extra push needed to turn a decline to an approval. Business owners shouldn’t wipe out one of their best bargaining tools.
4. For start-up businesses with no business credit, cash-secured business lending is an excellent way to establish 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.

Small business owners should remember, too, their responsiblity to be good financial stewards. If acquiring business debt results in more business earnings and preservation of cash on hand, the option should be carefully considered. Under the right conditions, business debt could enhance an owner’s ability to be an effective financial steward.

It would serve small business owners well to 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!