When it comes to business loans, there is this nagging myth that all debt is bad debt. That owing money is disempowering. That owing anything to anybody is to your deficit. But is this necessarily the case? What if the right kind of debt could provide opportunity? What if certain terms and lending strategies could actually grow your small business in bigger ways? Keeping these key questions in mind may just be the ticket when it comes to seeing debt in a brand new light:
Is equity financing better than a small business loan?
Well, it depends. Do you want to give up equity in your business? Surely this is the last resort? This is almost always a very expensive option down the line. Because equity financing costs you a portion of your business, forever. The idea that you are giving up long-term value in order to satisfy a short-term need, should be thought about very carefully. By financing the current shortfall, you are able to pay it back. Growing your business now, and safeguarding your investment in the future.
Is debt cheaper than your opportunity cost?
Sometimes without the small business loan, you cannot take advantage of the opportunity itself. Here taking on debt might be the difference between sail or fail. But before you do, the first thing you need to do is understand the lendscape. What options are open to you? How much will the debt cost you in the long term? If the opportunity is right and ROI is higher than the total sum of the debt, then it is usually worth it. Here debt is a strategic choice.
Are there any upsides to debt?
You might be surprised to know that the cost of interest reduces your taxable profit and, therefore, reduces your tax expense. The effective interest you’re paying is lower than the nominal interest because of this. This lower cost of capital needs to be factored in when calculating ROI on the debt. This is a useful way for small businesses to improve finances. This reemphasizes how debt can work for you. Rather than paying with equity that ultimately offers no long-term benefit. Here tax deductions can actually work with your debt to finance the opportunity as well as long-term business growth.
Can debt curb unnecessary spending?
When you are cash flush, you spend easily. But debt forces discipline. This is a necessary consideration when it comes to growing your business. In this way, a small business loan will encourage you to manage your finances carefully. It will ensure that you are accountable for every single transaction. Discipline is a great by-product of debt. And can ultimately teach you how to be very frugal in business. Especially in your business’ formative years.
Are all small business loans created equally?
Luckily no. Small business loans operate on a very wide spectrum. A Merchant Cash Advance, for example, is tailored to the retail industry. Here a small agreed percentage of every card swipe goes to the lender until the loan is fully paid off. This is great for seasonal turnover and loans are typically repaid in a very short term period. With very little effect on cash flow. In cases like these, a loan can be your best friend. Financing your opportunities and empowering your next big move. It all comes down to being extremely savvy when it comes to your business’ growth. A small business loan is just one more tool to do that. And once you know what you are getting yourself into, it is just another opportunity to take advantage of.
Speak with a lending specialist today about funding the growth of your business.