Pros and Cons of Using Debt for Your Business

Becoming and remaining entirely debt free is a common goal these days, and it’s a pretty admirable one. However, starting or growing a business requires capital, and this might lead the average person to consider borrowing money.

Using Small Business Administration (SBA) loans or credit to accelerate the growth of your business or to cover startup expenses can definitely benefit you in the short term, but is taking on debt the right choice for your business’s future? Let’s go over the pros and cons of incurring debt for the sake of your business, so you can make an informed decision.

Advantages of using debt

A cash boost can grease the wheels of your business and get things moving faster. If debt didn’t have the potential to yield benefits, no one would ever consider it (we can sense personal finance gurus like Dave Ramsey shuddering at the thought now). Here’s how borrowing money could potentially help your business:

Immediate access to capital and opportunity

Debt is, for all intents and purposes, pretty darn accessible (sort of a “limited-time offer” that never expires). Banks and other lenders have processes in place to protect their investments, sure, but jumping through those hoops can net you cash immediately. This access to capital can impact your business faster than saving up from your day job or shaving margin off of your business’s profits.

Missing out on a great opportunity is nothing short of heartbreaking. If the only thing holding your business back is the funds at your disposal, borrowing some in the short term can be just the solution you need. While we aren’t encouraging you to make rushed, emotional decisions, or gamble using debt, sometimes a little extra cash can make the difference and avoid a missed opportunity.

Establishing credit

It has been said that credit only represents your relationship with debt and isn’t valuable if you want to live debt-free. Let’s be real, though. Debt can still hold value for those who are responsible with the money they borrow.

Borrowing a reasonable amount of cash to kickstart a business (with a solid plan in place, of course) can pay off big time. By proving your reliability to lenders, you build a solid reputation, which you can leverage later on when you’re ready to take your business to the next level.

Consequences of taking on debt

While borrowing capital to enrich your business can be tempting, it has plenty of risk baked into it. Remember: lenders offer up their capital because it benefits them, not out of the goodness of their hearts. So, let’s take some time to consider the downsides of borrowing.

Interest

Lenders allow you to borrow capital with the understanding that they’ll get back more than they loaned. That’s the nature of debt. Since debt costs more than what you receive upfront, your business must generate enough profit to cover the repayments and also make the borrowing worthwhile.

Additionally, your repayment schedule doesn’t change based on how well your business is doing. Rain or shine, make or break, you’ll still need to pay your installments. You’ll be locked into these payments no matter what, so it’s crucial that you’re prepared to meet those obligations.

These extra costs and potential headaches can be avoided by funding your business’s growth through cash flow. While it’s tempting to lean on debt to speed things up, waiting until you have cash in hand could save you stress and money in the long run.

Potential loss of collateral

Banks and lenders usually prefer secured loans, meaning they want something of value to be used as collateral in return for lending their money. While you might not always need to provide collateral, the stakes are significantly higher if you do.

Assets like your home often serve as your bargaining chip, and this means a miscalculation can cost you big time. Instead of risking your valuables, consider saving diligently and aggressively, and delaying gratification by paying for your progress with cash.

To borrow or not to borrow

While it carries advantages and disadvantages, the decision to use debt to fund your business ventures ultimately boils down to your unique situation and how prepared you are. Seeking access to these credit lines and business loans isn’t a decision you should rush into. Talk to an accountant or bank representative that can walk you through the financial impacts of using debt for your business.

Ready to launch your business? Northwest offers the most cost-effective way to establish your business as a legal entity, and register a business domain to begin building an online presence. Our amazing Corporate Guides® are here to help answer any questions you have, so reach out to us today!