Can debt be good for your small business?
It's common knowledge that the more personal debt you have, the worse off your finances are likely to be. So, it's no surprise that many small business owners bring that same rule of thumb to bear on their business. But are there times when taking on debt is actually a good idea?
Let's take a look:
DEBT IS CHEAP
Simply put, all financing options "cost" something. Equity investment costs a percentage of your business, which if you grow, could end up being very expensive. Even using retained earnings (or cash) can be expensive if you could have invested that money into more productive uses.
Generally speaking, compared to equity investment or retained earnings, debt is relatively cheap. There's no opportunity cost, and the price of the financing is known up-front, meaning you can budget for it.
DEBT IS TAX DEDUCTIBLE
Since issuing debt is one of the ways the financial system creates and manages healthy inflation, the US government encourages business debt usage by allowing corporations to deduct interest from corporate taxes. While every business is different, and you should always consult your accountant before pursuing any business tax strategies, generally speaking the interest deduction on debt can help offset some of the interest cost, making debt an even more attractive financing option.
SO, IS DEBT GOOD?
That depends on the circumstance. While debt financing has several attractive qualities, taking on too much debt can hamstring growth and sometimes lead to bankruptcy. But debt can be helpful for growing businesses that don't have the cash reserves to self-fund the growth, or to help even out monthly cash flow issues. Debt can also be great for purchasing long term depreciable assets like real estate, vehicles, or physical upgrades.
Like with anything financial for your company, you want to make sure you consult with an advisor, accountant, or lawyer before pursuing a financial strategy.
If you'd like to learn more about managing your debt, reach out to us for a free business evaluation.