Hit the streets of the Greater Milwaukee Area, and you’ll hear many commendable stories about bootstrapping businesses, maxing out credit cards, and borrowing from every last relative. Although small business lending has increased since the recession, lenders still encounter business owners staunchly opposed to business debt. As a former CFO and CEO, I definitely get it. The desire to start, grow, or purchase a business without taking out a loan is undeniable in some situations.
Of course, it all hinges on your business goals and ambitions. It’s often very difficult to start and grow a business organically while managing payroll, hiring and engaging employees, financing future sales, and keeping adequate inventory. That’s where strategically using business loans to fuel your growth can help propel your business beyond what you might achieve without help.
Business debt as a growth tool
Large corporations often obtain financing through debt and equity simultaneously. However, equity is less accessible for small and midsized businesses and comes at a higher cost. Equity financing dilutes your ownership, control of your business, and its future profits.
So why do small businesses choose debt? Here are a few key reasons:
Easy planning. Under a basic, fixed-rate loan, business owners know exactly how much they will owe over a specific timeframe, simplifying budgeting and forecasting. SBA loans often extend the amount of time you have to pay the loan back.
Financial benefits. Along with relinquishing ownership, equity financing is sometimes more expensive than a business loan. Investors expect a return on investment that will be higher than the cost of bank loan financing. Many business owners don’t think about it that way—they react to the loan interest rate. However, investors often expect a 15 percent return through profits and dividend distributions.
Growth flexibility. Structuring your debt is key to achieving your goals. Creative terms and financing can help you increase capacity by acquiring a business with an SBA loan or increasing capacity with more equipment through an equipment lease or loan.
Contingency planning. Even if your business is in a high-growth phase, effortless access to dependable turnaround services like asset-based lending and cash-flow solutions like invoice factoring gives you peace of mind.
Building business credit. Just like building personal credit, your business benefits from a trustworthy record of debt repayment.
Those are just a few of the reasons that debt, used intelligently, is a tool that can leave borrowers better off than they were before. That’s true with personal debt solutions like mortgages and also with the right business loan.