How to Use Debt to Leverage Your Business
We’re used to thinking that debt is always a bad idea. However, the reality is that it’s possible to use debt to leverage your business and get ahead.
While you don’t want to get in over your head when it comes to debt, you can still use it to good effect if you are careful about how you go about borrowing.
Businesses Use Debt All the Time
One of the things that many people don’t realize is that businesses use debt all the time to get ahead. Even the most profitable companies, like Apple and Exxon, make use of debt as they manage their corporate finances. There are good reasons for businesses to take advantage of borrowing:
- Interest payments on business debt are tax deductible. (In some cases you can write off the bad business debt when people owe you money.)
- Borrowing can smooth your business cash flow so that you can make payroll and buy needed equipment even if you are waiting for income.
- For some businesses, borrowing can be relatively inexpensive, so it makes sense to borrow cheaply in order to boost growth.
- It’s possible to expand faster if you can get access to a large chunk of capital through borrowing, rather than waiting to save up the cash.
It makes sense for businesses to borrow because it allows them to expand and to meet day-to-day operation obligations. Without debt to leverage a business, many would fail, especially when first starting out.
Avoid Getting in Over Your Head
Of course, when you borrow for your business, you need to do your best to avoid getting in over your head. It’s important that you understand exactly how much money you need and then to avoid borrowing too much.
Not only do you need to have a good idea of what you need to be successful, but you should also be realistic about what your business will be able to pay back. If you are just starting out with your business, you might need to use your personal credit and assets in order to secure financing. This means that you should make sure that you can handle repaying the loan just in case it takes a little longer for your business to get off the ground.
It’s important to separate your business and personal finances as quickly as possible, but when small business lenders are assessing your loan application, they will want to know that your personal assets can handle repayment.
You don’t want to borrow too much, either, because the point of using debt for your business is so that you can get a good start, expand as needed or solve cash flow problems. Borrowing too much can take your balance sheet out of order and cause problems. If you are trying to attract investors, you don’t want too much debt worrying potential backers.
It makes sense to use debt in a way that helps your business and promotes growth. Capital is an important part of running a successful business, and there’s no shame in borrowing it to build a solid foundation. In fact, it’s what good businesses do in order to stay on top of their game.