This week we are talking about how to leverage business debt effectively. Debt can have a terrible reputation because of our associating it almost exclusively with consumer driven debt (or personal debt). Business debt is different from consumer debt in several ways
It is used to build long-term profitability for a business, not to buy consumable goods.
Business debt is based on the potential collateral of the business itself.
Business debt is utilized to take advantage of market demand, growth opportunities, and to gain an edge over competition.
Consumer debt is primarily focused on buying consumer goods (even essentials like food or clothing), and the collateral for this debt is the individual debtor, not the business assets themselves.
Deciding how much debt to incur for a business should best be done with a certified accountant who can create a valuation of the business itself, and determine the potential debt load capacity. According to Funding Circle, an idea ratio is a load of 36% or less - meaning the total debt should equal only 36% of the company's total valuation.
Figuring out the right time to take on debt can be difficult, but according to Plains Capitol Bank there are several clear signs that it's the right step for your business including:
Your business is booming and going strong. This allows you to plan ahead for seasons where cash flow may be more restricted.
You have a great credit score. Taking time to build a solid credit score will pay off in the long run with low interest rates and better terms
You're ready to expand. This can mean expanding your space, inventory, equipment, or your offered products.
If and when you are ready to take your business to the next step by strategically utilizing business loans, a strong business plan is a foundation that will keep your company on track and prevent foolish decision making. If you want to learn more about how to leverage business loans, then you can check out this pamphlet we created to explain the basics. As with anything, you should always consult your financial advisor or accountant before committing to any type of debt for yourself or your business.
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