Should I Take On Debt in My Small Business?

As a collection agency for small businesses of all kinds, you probably know our philosophy on debt. Well, because we’re working hard to resolve that debt for our clients day in and day out.  That’s what we do. Resolve debt.

The individuals, and in many cases, other small businesses we are calling on, are in some kind of debt. For whatever reason, they are not paying their bills on time or paying them at all and most times, there is a reason. Debt, in most cases has a negative association attached to it because so many get in trouble with it.

But is all debt bad? It all depends on who you ask but the main theory is no. as long as you are paying off that debt.

Think about that for a moment. Not everyone is in a position to pay for their home in cash. Not all of us can afford that car paid in full. That house provides our family shelter and that car allows us to get to work. All debt is not bad, but it is how you manage your debt that really matters.

If you are a small business, here are a few ways debt is part of being in business:

Equipment:

Depending on your industry and business type, you may require equipment that is expensive. Think of a machine shop or any other type of manufacturing business. Some of this machinery can cost well into six figures. Unless you have ample amounts of cash on hand, you may need to finance that equipment. In fact, it might even make total sense to do so. Maybe you are a smaller business and need computers and other technology to expand your business. In these cases, it can make perfect sense to incur some financing.

Facilities:

Again, the cost of buying a building or a warehouse outright may be out of reach. Your small business may be growing but your physical business cannot keep up. If that is the case, then financing your expansion is a smart move. You should however, check with your local business association, Chamber of Commerce and even the SBA because there may be programs you qualify for to aid you in your expansion.

Inventory:

Take a restaurant for example. Many food service operations do operate on some type of credit. And so do other types of businesses. In some cases, it makes sense not to tie all your cash flow up in your inventory. In that case, you are in effect, taking on a little short-term debt. For a small percentage, it might just make sense to keep your cash flow in the positive.

Here are a few examples of debt you should stay away from:

Credit Card Debt:

Just like your personal credit card, if you are going to use it for business, make sure you have the ability to pay it off each month. As we are sure you are aware off, because of the interest rates a credit card can carry, you can rack up some serious bad debt in a very short period of time. And it only escalates from there. Compound interest is a wonderful thing when its working for you. When it’s working against you, it can get out of control very quickly. Pay off those cards each month.

High-interest Loans:

Your business cannot afford to get into a high-interest loan. With the volatility of business, you should not be entering into any agreement that has a high interest rate. As we mentioned before, there are programs out there that any size business can take advantage of. The SBA is one of them and you can probably find other programs through your industry associations. If you are small business, you can even look to your city or town. Many from time to time, offer grant programs for economic development and you may qualify. These are typical low interest rates.

Leasing:

There are two schools of thought on leasing. While leasing a car for your business might be a great move and one that your CPA would recommend based on your conditions, leasing equipment in some cases can be bad. We have encountered a handful of businesses that offer leasing of equipment at very high interest rates. Many times because the credit rating of that business is not great and they do not have the cash or credit to purchase what they need. Many of these firms offer the “If the bank says no” types of deals. These interest rates can be very high and get you in even more debt. Try to avoid them at all cost.

Small business debt is not all that bad as long as it is moving your business forward in a positive way. If that debt incurs more debt and you cannot pay your bills, that’s when it becomes an issue and one that can snowball into a bad situation for your small business.