Many small businesses wrestle with the idea of adding debt to their company. Deciding whether or not to get a business credit card, traditional loans or alternative financing can drive any business owner crazy. I have had clients who have obtained several loans and have ended up in dire straits when they are no longer to carry the burden of debt. I have also seen clients who successfully use debt to relieve a specific problem or issue to better their small business. Before you increase your business debt load, here are a few questions that you need to ask yourself:
Can your cash flow support the debt?
Most business owners only consider the immediate need of obtaining financing to meet certain obligations. However the consideration should be when and how you are going to pay it back. Clearly understand why you need to add on more debt in the first place. If you need the financing to pay employees to cover gaps in customer payments, it may well be worth the added expense. However, if you are obtaining financing to pay “every day” bills, you may want to question that decision. That is because if you are having trouble making ends meet, adding debt is going to make your problems worse not better.
Why do you need financing?
This may be a simple question, but the answer may determine the type of financing you get. For example, if you are purchasing a building or an ongoing business, a traditional bank loan may be better. The interest rates are lower and it provides an opportunity to develop a good relationship with your banker. However, if you need it to buy more inventory. A less traditional loan may be beneficial, because it is not as restrictive.
Understanding why you need the financing will allow you to explore various options. There are numerous opportunities to fund your business. Understanding which is right for you will mean understanding your need for the money in the first place.
Can you afford the debt?
I will be honest, I am not big on obtaining debt. I really try to pay cash for my expenses as necessary. I have had business credit cards and business loans. I found that when my business began to suffer, I could not manage the various debts. It caused more problems than it originally solved. When my business hit one speed bump, everything began to fall apart.
Therefore, if your business cannot truly afford to add more debt, you should reconsider your options. Interest is an expense. That means for every dollar you borrow, it may cost a certain amount. Can you afford that extra cost? If you are hoping to rob Peter to pay Paul, go back to question one. If your business has no savings and few assets, the answer to this question may be no.
As with everything, I am a moderate. I truly believe in balance. There are numerous “experts” and “analysts” who will debate whether or not businesses should have debt. I certainly do not subscribe to the “spend someone else’s money” camp, which suggests that increase is debt is best. I am also not a part of the “no debt ever” camp. For a small business, I believe this issue is personal and specific. Utilize your professional team (attorney, accountant or financial planner) to help you make the right decisions.
Shahara Wright is an experienced and highly sought after business law attorney and business strategist. She is the author of From Entrepreneur to CEO and host of the CEO Collaboration Circle. Shahara founded The CEO Effect, LLC to work with small business owners who want to implement strategy to build capacity.