There is no doubt that we will see a boom in entrepreneurship once the lockdown is over. And as this occurs, the perpetual question of what type of funding strategy a business owner should use to grow their business will be back as a constant debate. Over the years, I have spoken with hundreds of small business owners and many of them have questioned the idea of using debts to grow and run their businesses. Here, I am outlining five key reasons why debts should be an essential part of a businesses’s growth strategy.
1. Flexible repayment options to remove pressure on future cashflow needs
Large investment firms, such as Goldman Sachs, JP Morgan, and Morgan Stanley offer asset-based lines of credit as a way to bring in new clients. The type of assets a borrower can leverage for those loans vary; but usually they include: cash, securities investments, real estate, insurance policy, and artworks. A key benefit for using an asset-based line of credit is that many times, depending on both the size of the loan and total net worth of the client, the bank will allow the borrower to negotiate the terms of the loans, such as repayment options. This can be helpful in cases where a business is concerned about its future cashflow need and the necessity to make large trunk of payments to lenders.
2. Can be used as set-aside or emergency cash
Another key benefit of an asset-based line of credit is that they are often very quick to set up and inexpensive to maintain. Usually the borrower does not pay a fee until they draw on the loan and the fee only applies to the amount of the loan that is being used. Therefore, this makes those types of lines of credit excellent candidates for a business to use as set-aside or emergency cash. In many other cases, the banks will offer “promotion rates” and many will allow their bankers to further cut the interest rates in order to strengthen relationship with a large client.
3. Good for short-term supply or seasonal need
A short-term line of credit may be ideal for a seasonal business, such as a snow removal or lawn care company, which can be used to hire additional staff or increase inventory. This is different than a long-term fixed payment loan for a significant investment in equipment that will be used to increase production over a long time period.
4. Help maintain ownership of your business
By relying on debt, the business owner can increase the value of their company without having to reduce their share of ownership through the sale of equity to investors.
5. Invest your money
Many new business owners will invest their entire life-savings in their businesses, which often end up being a mistake. By using debt, you can invest your personal assets and take advantage of future opportunities in the market.