Business Debt - Good or Bad?

February 2019

Being in debt is a very bad thing, right? Well, not always. When it comes to personal debt, there’s good debt (a mortgage) and bad debt (maxed out credit cards and bank overdrafts). And for small businesses, debt can actually be a very good thing - if you are using it correctly.

Being in debt doesn’t necessarily mean your business is overextended or doomed to fail. It should mean that you have chosen to leverage outside funding – be it a loan, an advance, or a credit line - to build your business’ success.

Since smaller businesses don’t have the same easy access to standard bank loans as big corporations do, chances are you’ll be looking at alternative loan options that are available online. Before you accept a funding offer, figure out how you will use it to increase your business revenues. You may want to ask yourself the three questions below:

Will the funding increase my revenue?

Carefully review your plans for the funds. What do you intend to do with the money? Are you looking to expand into a bigger space, hire more people, increase inventory or buy more equipment?

And here are the big, important questions: How will doing any of these things increase your revenue stream? And will it result in sustainable new revenues?

The best reason to take on business debt is when you know it’s an investment that will make enough money to offset the fees attached to the funding offer. The cash flow that you can realistically expect from additional staff, space, products or equipment should be more than what you will pay back for the funding, and – best case scenario - it should continue to bring in revenues. And you need to be really realistic about this; it should be a solid business plan, not something that just sounds like it might work out.

Bottom Line: Your projected profit should outweigh the cost of the debt.

Will the funding stabilize my business profits?

Your business probably fluctuates seasonally, and you’ve probably learned how to anticipate those slowdowns and accelerate when you’re in the fast lane. But it can be difficult to plan for your biggest seasons, when you’re stuck in a slow time. For example, if summer is slow for you and cash is tight - how can you afford to increase your inventory in preparation for your busy holiday season?

Funding helps you meet future business needs without compromising your ability to deal with current obligations. Just crunch the numbers to make sure that your reasonably anticipated profits outweigh the debt. And have a backup plan to manage risk – seasonal trends can be affected by the weather, the economy, and other issues that are out of your control.

Bottom Line: Taking on debt to leverage realistic profit opportunities can be a sensible choice.

Will the funding save my business?

Perhaps you need funding to navigate through a rough time in your business cycle. It may be a seasonal slump, it could be that you are waiting for some big invoices to be paid. Whatever the reason, the question to ask yourself (and answer honestly) is whether your business is failing or whether it’s just hit a rough patch that can be overcome with an infusion of funds and a little time.

If you’re dealing with a business financial challenge, you may be considering funding the business from your own credit cards, or asking friends and/or family for a loan. That’s a decision you and your accountant/stakeholders need to make, but remember that once you accept a loan from someone you know, the lender typically feels a sense of ownership. They’ll want to be involved in how you run the business, and how you spend your money for a long time, probably even after you pay back the loan. You can avoid complications by accepting funding from a third-party. Best bet – work with a company that wants to support your success, but isn’t interested in telling you how to run your business.

And it's also important to know when to stop throwing money at a business. Take on debt to expand success, not to prop up a company that is fatally flawed. Life support is fine if you need to get back on your feet, have a viable reason to believe you can save the business, or just need to hold on for a while until you can sell it or move to another location. But if you can’t fix it, know when to let go.

Bottom line: Taking on debt can be a realistic solution to short-term business problems.

Ready to put debt to work for your business? One Park Financial works to help owners of small and mid-sized businesses access the working capital that they need. Our process is simple and straightforward, and we’ve helped many small businesses who have been turned down by banks to access funding. Visit One Park Financial or call 855.218.8819 to discover the options that make sense for you and your business.