Many companies use debt to get ahead, utilizing benefits like tax deductions on interest payments to leverage their businesses to help them expand and meet their daily operation expenses. There are many advantages to using debt to manage your corporate finances, including interest payments on business debt being tax deductible, smoothing your business’ cash flow so that you can buy needed equipment while still making payroll, and being able to expand faster if you get access to enough (capital rather than waiting to save up the cash). Here are some ways that you can strategize debt to your advantage to help your company get ahead of the competition.
In Your Best Interest
Before borrowing you need to have a good idea of what your business will be able to pay back. It’s important to ensure you can handle repaying the loan just in case it takes a little longer for your business to get out of the red. Ensure that you don’t borrow too much, as the point of borrowing is so that you can get a good start, solve cash flow problems, or expand as needed.
With debt on hand you stay in control of your business. It can also work out to be a cheaper form of borrowing than equity. Debt can appear costly at first but in the long run it can be worth it. It can also be quicker than looking for potential investors, even after you go through an application process and provide evidence of your business’ financial viability. Paying interest on debt also reduces your taxable profit and thereby reduces your tax expense.
Debt also encourages discipline. Debt brings with it discipline in spending and investing that can help your company, especially in its formative years.
Smooth it Out
Smoothing out your business’ cash flow can seem like a daunting task, but only a perfect business gets cash from customers just in time to pay all of its debts. Try using Excel to build a simple model that tracks weekly incoming cash by source and outgoing cash by use. A weekly model will help capture the ebbs and flows and help you identify structural problems.
Cash does not refer to sales, income, or profit, but merely the money coming in versus what’s going out at any given point. Lower cash flow points to a cash management problem, meaning a disruption to your daily activities, which if not addressed could even lead to the closure of your business. Having more than enough of it means cash is just wasting in your hands when it could be earning interest in the bank. This makes cash flow management crucial, although it can be difficult to master. It involves predictions and depends on the volatility of the market. Borrowing allows you to smooth your business’ cash flow and maintain control of your business.
A Tool to Expand Your Business
Knowing when to expand your business is a big question with make or break outcomes. Utilizing debt can make this dream a reality. You can use longer loans to purchase real estate, equipment, vehicles, and inventory. Generally, the term for a commercial real estate purchase is twenty years, while terms for vehicles, equipment, and other business assets range from three to ten years.
Another advantage to long-term debt is that the payments are fixed throughout the term of the loan, allowing borrowers to know in advance how much they need to pay monthly. A business loan will also help you build your credit record and help position you for additional loans in the future.
What indicators should you be looking for while you evaluate your business? Not having enough time to monitor your business is one key indicator that it’s time for you to think outward and expand. It can start out seemingly pleasant, but having too much business can lead to burnout and exhaustion.
Another key indicator is the demand for your product or service is trumping the supply. If you launch a product and the market loves it, you may need to expand your business faster than you’d expect. Having cash sitting in your bank account is another indicator that it’s time for your business to expand. Money sitting in your bank isn’t doing your business much good.
Yes, it’s important to have an emergency stock so you can weather any financial storms but beyond that, it’s just lazy cash. If you have lazy cash, it’s time to expand your business. Get your money working for you. Use your extra cash to expand your business and get your money working for you.
Although it could feel counterintuitive, the effectiveness of these debt creating methods of success are proven time and again. Stick to these simple tips and a boom period will surely be on the horizon.
Joshua Cooper | Contributing Writer