advertisement
advertisement
The Fast Company Executive Board is a private, fee-based network of influential leaders, experts, executives, and entrepreneurs who share their insights with our audience.

Leveraging debt in business

Business debt can be a tool, just like your smartphone or the latest software.

Leveraging debt in business
[Natee Meepian/Adobe Stock]

Debt is a common quicksand to those starting a business, and even to existing business owners.

advertisement
advertisement

But, is there a way to leverage debt to continue business operations and expand your company?

As a business owner, this is your reality: Month after month, you have to pay wages, keep your inventory stocked, pay rental fees and bills, maintain operations, and improve business flow. You commit to keeping everything running because there is a lot at stake.

As you work to balance all of this, you may be concerned that taking on debt could damage you or your company’s reputation. But in my experience, business debt can be a tool, just like your smartphone or the latest software.

advertisement

THE PURPOSE OF DEBT

The purpose of debt in business is different from personal debt. When someone takes on personal debt, many see it as a sign of failure. But it’s important to keep in mind that businesses receive credit scores, just like individuals. Taking on debt gives a business a chance to improve their credit score and, over time, increase their credit limit with lenders. Well-established business credit is an asset to the business.

Adequate cash flow is necessary in order to maintain a business. Business loans support continuous cash flow and help leverage the existing profits the business is currently generating. For example, in the real estate business, there are numerous site staff who need to be compensated in order for the business to generate income and stay afloat, even if the owner lives elsewhere. Or, you may run a seasonal business that uses business loans to provide cash on hand and compensate staff in the off-season, then settle the loan when the business is at its peak.

advertisement

Debt can help you expand your company, add more employees, and/or rent a bigger commercial space, and it often makes more sense to take out a loan and accomplish those things now than it would to wait until you have enough cash saved up. Timing is crucial, and you often have to strike while the iron is hot to take advantage of interest from target clientele. Otherwise, you risk wasting an opportunity.

To decide where debt is relevant to your business’ growth, here are a few things you should consider:

• The amount of money you intend to borrow.

advertisement

• Fund allocation once the loan is approved.

• Actual interest rate and changes that may occur.

• Timeline for payment.

advertisement

• Return on investment (ROI) of the planned loan allocation.

To sum up, use debt in your business to generate additional income. It is a weapon that can help you build abundance. Just be sure to keep close tabs on the amount outstanding and your plans to settle your loans. Debt has to be carefully controlled to prevent a downfall.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

advertisement
advertisement
advertisement