Debt is a word many people dread, and for good reason. We spend most of our lives paying off debt – student loans, car finance, credit cards. No wonder we have come to associate debt with bad and difficult times when we have very little money and need to be careful with our spendings. However, not all debt is created equal, and certainly, not all debt is bad.
In fact, there are times when incurring a little debt is good for the long term health of your finances. If you are going into debt to buy a new, luxurious car, go on a lavish holiday to some exotic place, or afford any type of short-lived fun; that creates a bad debt. However, if you take a loan to invest in your business and modernize your office, or find a great opportunity for residential real estate investing and borrow some money to purchase a rental property; that is definitely a good debt. If a loan can help you to make investments and generate returns further down the line, it is worth to take it. This is especially true when you’re running your own business.
Business debt can actually help you to grow your company. But how do you know when its good debt rather than bad debt? When is debt a good investment for your company? And are there any other options?
Debt or Equity?
When business owners are looking for capital, they have two main options. Sell shares in the company, or secure a loan.
Equity financing means there’s no need to repay funds. There’s no extra financial burden placed on the company. But there’s a drawback. If you opt for this type of funding you have to share profits and decision making responsibilities with your shareholders.
In contrast, debt financing means taking on a loan and interest. This may become problematic if that loan doesn’t help your company to generate greater revenue. But, in contrast to equity financing, you maintain full control of your business profits and decisions.
But before you decide which financing option is for you, you need to know when it’s appropriate to take on business debt. Here are a few times when taking on business debt is a good idea.
When Business Debt is Good Debt
Investing in Marketing
You may have the most amazing product or service on the market, but if no one has heard of it, you’re not making any money from it.
Marketing often comes way down on the list of business essentials. It seems that there’s always something more pressing to pay for.
That is why creating a marketing budget is a good reason to accumulate a little debt. That money can be used to pay for PPC ads, billboards, magazine space or advert design. And to develop a long-term marketing strategy.
And the upturn in customers and revenue should help you to pay back the loan you’ve taken out.
Taking on New Employees or Upgrading Your Workspace
If you started up your company alone, you’ve likely endured long days and short weekends in order to get things off the ground. But there’s only so much you can get done in a day.
When you’ve reached your limit and need to add another pair of hands to the team (and/or the space for them to work in), it may be time to take out a short-term loan. Take into account wages and any costs associated with hiring a new employee when deciding on how much is appropriate to borrow.
A new employee could bring new skills to your business, allow you to improve the speed and quality of current operations, or give you the time to step back and strategize over the bigger picture.
Either way, the aim is that by expanding you’re workforce and/or workspace you’re increasing the company’s income potential – even if it means initially going into a little debt to be able to afford this expanding.
Improving Your Customer Offering
The longer you spend in your industry, the more you spot areas for improvement. You might realise that your product no longer fully meets your customers’ needs. Or a new competitor has launched a service that outranks yours.
You might even realise that a certain business tool or program is needed in order to improve your customer experience and business performance.
An injection of money at this point can help you to develop your product or service, or even offer new products and solutions to your clients, thus staying at the top of your game and ensuring a good level of income.
Building Your Credit Rating
Your business has a credit rating just like you do. And you need it to have a good rating if you want to secure a loan.
Requesting and paying back smaller loans in the early stages of your company’s life can help you to secure bigger loans in future. It may also help you to develop a relationship with a specific bank or lender, again making future loans easier to come by.
As you can see, not all business debt is bad debt. Take on good debts in order to grow your company and your revenue.
