Some business owners fear debt, treating it as an admission that the business has problems. Nothing could be further from the truth. Debt is simply a tool. It’s neither good nor bad on its own – that’s determined by how you use it. In this article, we’ll explore three uses of credit that can improve your profits and strengthen your business.
Keeping What’s Yours, Yours
You’ve worked very hard to get your business up and running. You may need extra capital for a whole slew of reasons, such as expansion, seasonal adjustments, increasing inventory, etc. If you’ve taken an unreasonable dislike to debt, it can be tempting to sell off part of your business, known as equity, to a new partner in order to raise money. But think twice. When you sell equity, someone else gets to profit from all the work you’ve already done, and is a permanent partner who may feel the need to offer you suggestions even if you don’t want them.
Contrast this with a loan. You borrow the amount you need and repay principal and interest over time. You don’t give up any control of your company unless you default on the loan. Once paid off, the loan disappears and leaves you free to run the company as you see fit. Furthermore, the interest on the loan is a tax deduction on your business return. The safest way to proceed is to first make sure you will have enough cash receipts to pay your loan principal and interest on time.
Leverage Your Profits
A good way to gauge whether an initiative will be profitable is to measure its return on investment (ROI). When dealing with debt, you want to ascertain that an investment’s ROI exceeds its after-tax interest cost. For example, suppose you can land a new contract worth $20,000 by installing a new machine that costs $8,000 to buy. You can take out a loan and pay, say, $2,000 in interest. That means you would make a gross profit of $10,000 ($20,000 – $8,000 – $2,000), well beyond your costs, so it makes sense to borrow the money and purchase the machine.
Prepare for Future Sales
You may have a highly seasonable business, which means that your cash flows are uneven during the year. A loan can provide you with the capital to buy inventory during the quiet period when cash is low. For example, suppose you own a fashion boutique in Miami Beach. Business is very slow during the summer, but you must order inventory four months in advance to ensure you get the latest fashions. It makes sense to borrow money in June and receive your inventory in September, just in time for the start of the busy winter season. Now you are in position to enjoy a large sales volume, repay your loan and realize a nice profit.
Not Only Why, But Where
It frequently makes sense for your business to borrow. When the reason is good, the business can grow. But just as important is where you get your loan. You want a lender that understands your business, understands the logic of the loan, and is willing to lend you money at a reasonable rate, even when others say no. Seek out lenders with fast service and convenient repayment arrangements. A lender with daily automatic repayments can help your business more easily afford the small payment amounts that are directly debited from your bank account. That means you don’t have to worry about big monthly payments, a real problem during periods of low cash flow. Small business loans should be used as the good debt that can help grow your business as you take on new projects and expansions.
