When it comes to debt, opinions differ. Some argue that it is necessary for business growth, while others believe that it is a dangerous path to financial ruin. In this article, we will explore both sides of the debate and help guide you in deciding what is the best debt strategy for you and your business.
One of the most well-known personal finance experts, Dave Ramsey, advocates for living a debt-free lifestyle. He suggests that debt is risky, puts a person or a business at risk of defaulting on the loan, and creates stress, both financial stress and anxiety. Debt can also limit financial freedom, as it can consume a significant portion of either an individual's income or a business's cash flow. In addition, debt is often expensive and can limit opportunities for career changes, investments, or pursuing other ventures.
While being a debt-free business can have its benefits, such as reducing financial risk and increasing financial flexibility, there are also costs associated with it. For example, by not taking on debt, a business might miss out on growth opportunities that could have been funded by borrowed capital. This is especially true in industries that require a significant amount of capital to get started or to expand. We have worked with many clients who have struggled with their debt mindset, wrapping their heads around being worthy of taking on debt or pursuing additional opportunities. It's important to understand that debt is not always bad, and it can be a useful tool for growing a business.
As a business owner, you need to weigh the costs and benefits of taking on debt and determine whether it is the best option for your business. If you do decide to take on debt, it's important to have a plan for paying it off. This means creating a budget and making regular payments to reduce your debt load. It's also important to understand the terms of the loan and any associated fees, so you don't get caught off guard by unexpected costs.
While being debt-free can offer peace of mind, it's not always the best option for growing your business. So take the time to evaluate your options, create a plan, and make an informed decision.
Now, let’s explore the pros and cons of debt for small businesses.
Pros of Debt for Small Businesses:
- Access to Capital
- Having access to debt allows small businesses to have the funds to get through difficult times and weather challenges that may come up. When cash flow is tight, debt can provide the capital needed to pay bills, make payroll, or invest in the future.
- Tax Benefits
- Businesses can deduct the interest payments on their tax returns. This reduces your tax liability, which can save your business money. Without debt, a business may miss out on this deduction, resulting in higher tax bills.
- Increased Leverage
- Debt can be used as leverage to increase returns on investments. Without debt, a business may not have the leverage necessary to achieve higher returns.
Cons of Debt for Small Businesses
- Limited Creditworthiness
- While being debt-free can improve a business's creditworthiness in the short term, it may also limit your ability to obtain credit in the future. When you go to obtain debt, lenders use the business's credit history to value its ability to repay loans.
- Higher Interest Rates
- Debt typically comes with interest, which means that small businesses end up paying more for the capital they borrow. High-interest rates can cut into profits and create financial strain.
- Increased Risk
- Taking on debt always carries risk. If a business is unable to repay the debt, it can lead to financial ruin. Additionally, interest payments can create a significant financial burden, making it difficult to invest in the business's future.
- Making the Right Decision for Your Business
- It's important to weigh the pros and cons of debt carefully before making any financial decisions. Taking on debt can be a smart move for small businesses, but it's essential to consider the long-term impact on the business's financial health. When considering debt, it's important to work with your money team, including your CPA, financial advisor, and business coach, to make informed decisions. Decisions should never be made solely for a tax break, and it's essential to have a clear understanding of your business's stance on debt.
Where to Find Loans for Small Businesses:
If you've decided that taking on debt is the right move for your business, it's important to consider your options carefully. Here are a few places where small businesses can find loans:
- SBA (Small Business Administration) The SBA offers government-backed loan programs that provide low-interest loans to small businesses. These loans are available through banks and are designed to help small businesses start, grow, and expand.
- Credit Unions Credit unions are nonprofit financial institutions that offer loans and other financial products to their members. They often offer lower interest rates and fees than traditional banks.
- Traditional Banks Traditional banks can be a great option for businesses that have established credit and a solid financial history. However, it can be more challenging for newer businesses to secure a loan through traditional banks.
Debt can be a smart move for small businesses, but it's important to look at all the impacts it will have. By working with your money team and understanding your business's stance on debt, you can make informed decisions that support the long-term success of your business.