Debt gets a bad rap. It isn’t for lack of a good reason. Debt can be a very bad thing if not handled properly. However, handled responsibly, debt can actually be a good thing for your business. It is similar to planting a garden. The right amount of fertilizer, handled properly, is not necessarily pleasant but it can cause significant growth and a successful garden. Too much fertilizer will burn up your garden and you are left with nothing useable. The same is true of debt in a business. No one wants debt, but the right amount used properly at the right time can cause significant business growth. The wrong amount, the wrong time, and improper use can leave you with nothing. Following are just three of the ways debt can be good for your business.
1. It Can Be Cheaper than Equity
Whether you are looking for restaurant business loans, seeking gas station financing, or looking to fund your latest startup, you are going to need money. This can come from a few different sources, the most common of which include selling equity to investors and debt. The problem with selling equity to get a business up and running is that it is hard to get a good valuation on that equity in the beginning. Perhaps it isn’t worth so much now, but in just a few years that value could double or triple. Even if that is considered, it is still only an estimation.
It is difficult to know the cost of funding raised from equity, while the cost of debt is the interest rate, and that is tangible regardless of when in the life of your business you need it. In the beginning, debt could be cheaper than equity.
2. The Benefit Could be Greater than the Cost
Consider that you have a huge order and do not have the inventory to fill it. The cost of the inventory is $2,000, but it will sell for $12,000. If short term financing will allow you to purchase the inventory and pay less in interest than the $10,000 profit you stand to make, then the debt is actually a good idea. That is the old adage of spending money to make money in full force.
3. Debt is Not Something for Nothing
One key that is often overlooked is that there is a tax benefit to paying interest. Other forms of funding that do not require interest payment do not carry this benefit. While this may not be enough on its own, certainly the presence of one of the other circumstances could tip the scales in favor of debt.
While debt can be trouble if mishandled, it can also be a great tool for your business if handled responsibly. If you feel financing is right for your business, Biz2Credit is here for you. Our network of over 1,300 lenders is ready to help you find commercial business loans or short-term commercial loans that fit your needs. Visit Biz2Credit today for more information.