The Small Business Survival Guide: Making Debt Work for You
As a small business owner, you might be hesitant to take on debt. However, it’s rare for a business to grow without utilizing bank debt. To expand your operations, you often need to invest in fixed assets, increase inventory, manage accounts receivable, and fund new products, services, and marketing efforts. Not to mention, you’ll need to cover rising payroll costs and protect your intellectual property.
Debt isn’t something to fear; it’s a valuable tool in your management toolkit. When used wisely, it shows that you’re creditworthy and can help you navigate through challenging economic times. With the right approach to utilizing debt correctly, you can focus on running your business rather than worrying about cash flow.
Why Using Debt Can Be Smart
Many small businesses avoid debt because they’re afraid of taking on financial obligations. As a result, they may try to finance long-term assets using their current cash flow. This can lead to stress over cash reserves and negatively impact business operations. Remember, cash flow is crucial, especially during economic downturns, so borrowing might be a more practical solution.
Types of Debt and How to Use Them
There are generally three main ways to borrow money: term loans, leases, and lines of credit. Each has its own benefits and best-use scenarios.
- Term Loans
Term loans are ideal for purchasing major assets or making significant investments. If you expect it will take more than a year to recover the investment, a term loan might be the best choice. Term loans are repaid over time with both interest and principal, usually on a quarterly basis. This approach allows your business to use the revenue or savings generated by the investment to pay off the loan. - Leases
Leasing equipment can be a great alternative to buying outright. A lease allows you to use the asset while making regular payments. Sometimes, leasing can be advantageous if the leasing company is willing to provide more funding than a bank would. Although the interest rate on a lease may be higher than on a loan, it might still be more cost-effective in the long run. Be sure to review the lease terms carefully, including the length, cost of acquiring the asset at the end of the lease, and any personal guarantees required. - Lines of Credit
A line of credit is useful for managing cash flow fluctuations, such as seasonal sales or extended payment terms. It helps you even out the ups and downs of your finances. However, it’s important not to rely on your line of credit too heavily. If you consistently max it out, banks might see it as a sign that your business lacks sufficient equity. For major asset purchases, a term loan is generally a better choice than a line of credit.
Conclusion
Using debt correctly can be a game-changer for your business. By choosing the right type of debt and managing it wisely, you can invest in growth and navigate through tough times more effectively. Remember, debt isn’t something to shy away from—it’s a tool that, when used properly, can help you achieve your business goals and keep your company thriving.
