DEBT IS OFTEN a part of business that can’t be avoided. When used wisely, it can be a catalyst for business growth. When used unwisely, it can be the undoing of a business. How you use it can make or break your store’s performance, yet many business owners fail to understand debt fully and the impact, both positive and negative, that it might have.
There are a number of factors you should consider when deciding to leverage your business. Here are five important things to consider.
Invest in Assets That Increase or Provide Positive Cash Flow
Debt comes at a cost, and that cost needs to be offset by a source of income. If you invest your loans in assets that can either increase in value or provide income in excess of the servicing costs, then you are ensuring your debt is a positive generator for your business.
Separate Business from Personal
Using business debt for private purposes can lead to long-term cash flow issues. This is a continuation from point one. If you load the business with debt to fund a holiday home, then you need to ensure other parts of the business are strong enough to meet the extra cost, as the asset itself will not be providing cash flow (unless you choose to rent it out).
Don’t Overextend
Deciding to take on debt is the first question, deciding how much to take on is just as crucial. Assess the risks of your investment losing money, the equipment you buy dropping in value, or that the income from your investment won’t create enough cash flow to meet the debt obligations. Your income returns can be uncertain; your debt obligations are often set in concrete.
Structure Correctly
How you set up your debt can affect the long-term cost, not only in terms of what you may have to pay back, but whether you can enjoy a tax benefit from the IRS. It’s important to get good advice before organizing your loan.
Consider the Security Offered
Banks will always seek as much security as they can. In a perfect banking world, they will want everything you own to underwrite the loan, including your firstborn! You need to be comfortable with what you will give and how forfeiting security will affect future decisions, including getting additional funding later.