Business Debt – Yes or No?

Oh boy.  Debt.  That nasty four-letter word nobody likes.  I’ll go out on a limb and say there are a couple of very good reasons to go into debt as an entrepreneur and, if you are ever going to grow and scale your company, then debt is often the easiest way to do it.

First things first, though – we have to get our vocabulary right.  When you’re dealing with “good” debt – the sort of stuff that can build your business and make you money, its often more comforting to call it “leverage” and smile as you say it.  What’s more important, that leverage can be critical to taking your small company and making it into a big company … the kind we like to call a Great, Growing Company.

Here’s four scenarios where having some leverage might be just the ticket to success…

·         Increasing and developing product lines.  Everyone loves how Daymond John started FUBU with $40, a sewing machine, and a desire to build something great, but $40 isn’t going to get you very far.  If you could bump that into $40,000, how many more products can you create?  How many more relationships can you foster?  How much more can you ship?  The leverage from loans and capital can give you the tools you need when the business plan is solid and you simply need to get bigger.  Don’t be afraid of leverage if it’s helping you move ideas into income-producing production.

·         Increased marketing.  Imagine you have a great product sitting on the shelves and you just need to get the word out about it.  Again, here’s an example of a perfect time to take on some debt to buy the advertising that will, inevitably pay for the debt.  The key is this – the money from the debt is being used to generate the income to repay the debt and generate more income.  As in our previous example, leverage is being used simply to “kick-start” the sales process.  This is a good place for that leverage.

·         Credit line management.  At a certain point, you’ll have grown your company large enough to develop lines of credit – essentially a revolving source of funding based on the total value set by the company and the institution.  The good news is that this is debt that is only as large as what you need.  A million-dollar line of credit might only need to provide $30,000, but you’ll have the option of another $970,000.  Pay off the $30K and you’re back to a million in potential leverage.

·         Hiring.  It’s no surprise that if you can’t pay folks, you won’t have folks (or at least not a team worth having), so taking on some debt to ensure you can train your team and pay them while you ramp up production and distribution may be a critical step in company growth.  

There’s something else, though, when it comes to leverage, and that’s the psychological aspect of debt.   Sun Tzu, in The Art of War, discussed the idea of how a general should proceed if he was caught on “deadly ground” – where the likelihood of defeat was high and the options for retreat were low – and his advice was simple – order the soldiers to smash their cooking pots and engage in the battle.  The idea?  Simple – they know they must win or they will die.  Taking on debt in your business to actively grow your business could be a catalytic event in your business’ growth.  You’ll find yourself working harder, looking for the advantages for growth and expansion that you might never have looked at if you were comfortable and simply resting on your … shall we say … assets.

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Paul Rosen