Do You Really Need Debt?

How many small businesses with debt really need it? If you are a small business here are some things to consider.

A Faulty Assumption Perhaps

As I follow others thoughts I cannot help from but be surprised at how many think that in order to succeed in business they have to take on debt. What makes this interesting is that so many of these are start-ups or very young businesses. Reading between the lines, I have come to the conclusion that many have simply assumed they would have to borrow to start or grow their business. While there are times that debt is appropriate, assuming it is necessary can be dangerous to your financial health. Why? Simply, there are numerous ways to finance your business.

Startups

A startup is one of the most common situations where people think they must have a loan. I include the extensive use of credit cards to fall in the same camp. But, there is a problem with this approach. When someone borrows to start a business there is a real risk of being tied to meeting the stipulations of the lender rather than focusing on what really matters to grow the business. In addition, servicing the debt in the form of interest and/or principal payments can place a big financial burden on the company, at the same time diverting cash flow away from more productive uses.

Growth Business

A growth business often looks like a continuous startup, simply because things are changing so fast and there always seems to be a need for more funding. However, just like a startup a growth company needs to remain focused on the aspects of the business that will improve it and increase sales and profits. Management should carefully evaluate what the financial needs really are, and if they do decide to borrow keep it to a minimum.

Ongoing Business

Some companies seem to accept the premise that having debt is just the way it is. But, I often wonder just how carefully they evaluate that assumption. Primarily, are they sure they are spending on the correct things, or are they investing in activities that are non-productive or of little value. Could the financial resources invested in these areas be more effectively used for essential functions and activities that grow and improve the business?

Regardless of whether a company is a startup, a growth company or a well-established business, being under the burden of debt is not a good place to be. The Bible puts it this way in Proverbs 22:7, “The rich rule over the poor, and the borrower is slave to the lender.” Obviously this is not speaking of a slave in the traditional sense, but referring to the level of control a lender has over a borrower. In essence that debt becomes a financial ball and chain that drags a company down, impeding progress.

financial-ball-and-chain

The Alternative

If your company is a startup and you have to borrow to start, perhaps it is best to postpone it until you have the resources. If you are a growth or an established company, look closely at how you can generate funds to self-finance. Are you controlling the level of inventory you carry? See 3 Low Cost Sources of Cash – Part 1 and Small Inventory – Big Benefits. Is accounts receivable being collected in a timely manner? See 3 Low Cost Sources of Cash – Part 2. The posting Cash Management-It’s Not About the Cash Account is a general discussion about cash and what you really need to consider to be sure you have an adequate amount.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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