When to take on debt?
When to take on debt?
Author: Caron Beesley | September 11, 2018
If you own a business, you probably spend a lot of time looking at your cash and expenses. As a business, cash ensures you can pay your bills and avoid bankruptcy. So why should your business take on debt? After all, avoiding debt and achieving financial independence is often considered a smart business approach.
But is it really? The truth is: not always. In fact, debt is often essential to business success. After all, if you run a company, at some point you’ll need cash to buy inventory, equipment, or expansion. Taking on debt to finance these businesses can lead to a large payback, increase profitability, and improve your cash flow.
But how do you know if you’re seeing a good investment opportunity – and if it warrants debt?
Mike Michalowicz, author of Profit First (which teaches entrepreneurs how to transform their businesses from “a money-eating monster into a money machine”), shares his tips with us. to know when it is reasonable to be in debt.
Identify areas that are always profitable
Avoid going into debt if the opportunity isn’t worth it. To do this, identify the elements of your business that are consistently profitable and have a predictable return on investment. If you borrow money today to do more of what is already profitable, you are likely to make a large profit tomorrow, Michalowicz explains. “The key to paying off debt is funding what’s proven to work.”
Now, exaggerate what’s going well
Once you’ve identified what you’re doing right and what you’re doing wrong (i.e., what isn’t working for your business and is cutting profits from it), magnify that.
For example, if you’re looking to buy a piece of equipment that can produce a part faster and more accurately than can be done with manual labor — it’s a prudent investment, because the end result. Results (produce products faster and sell more) are predictable. “When you have a predictable return on investment — that’s where you invest your cash,” says Michalowicz.
Additionally, by focusing on doing more of what is already profitable, you will also increase your chances of getting your funding request approved.
Be selective about your debt
If you decide that now is the time to invest in your business or you have a worthwhile growth opportunity that can’t wait, you’ll need to find the right financing. This is another important factor when you are considering whether to take out a loan. There are many options out there and not all loan products are created equal. For example, traditional bank loans and lines of credit can be difficult to obtain and require a lot of documentation to support the application.
Why? Commercial lenders have made access to credit extremely difficult for small business owners, requiring hours of paperwork, high FICO scores, and higher lending thresholds than most businesses need or want.
Additionally, it can take several weeks for traditional small business loans from a bank or SBA to be approved. Alternatives, such as Fundbox (which Mike Michalowicz uses for one of his companies), can provide faster online credit decisions. If you are approved for Fundbox, you can withdraw your funds at any time and are available the next business day. Learn more about how Fundbox works.
If you’re ready to learn how the right debt financing with the right initiatives can help grow your business, watch Michalowicz explain it in this video.
This article was updated in September 2018.