Is debt always bad for your business?

In Summary

• Do your research: Understand the loan products available to you for your business.

•Understand the terms: What is the implication of taking a loan?

Do your research: Understand the loan products available to you for your business.
Do your research: Understand the loan products available to you for your business.
Image: SHUTTERSTOCK

Most business owners would prefer to avoid debt at all costs and for a good reason. Debt has been known to cripple businesses and increase the risk of closure. However, there is another side to debt that is good for your business. Good debt is a key part of funding businesses and can make a positive contribution to the overall long-term financial position of your business.

Gakii Biriri, CEO and Founder of The Financial Therapist Africa and a Member of WomenWork, asserts that not all debt is bad for business. “For most of us growing up in African homes, we have been warned repeatedly to never take loans, while in fact debt can be used to accelerate your financial goals.”

 

Here are Instances Where Debt May be Good for Your Business

1.Debt Can Help Your Business 

The biggest barrier to growth for most SMEs and MSMEs is the lack of readily-available cash to achieve steady and scalable growth.  Women business owners tend to fund their businesses from their savings to avoid having obligations. The challenge is that if you have very small savings this means you’ll only be able to have a small business as businesses need money to fund growth.

If you are ambitious and want to grow the business you have beyond your personal means. Biriri observes that it’ can be a good idea to use someone else's money to achieve your own business goals. The pandemic and the resulting economic challenges haven’t made things easier. Debt is a good way to get the money needed to pay rent, buy the required stock, market your products, and even hire new employees.

2. Debt is Cheaper than Equity

This may be surprising but equity is an expensive way to fund your business. Equity financing involves selling part of your business stock to raise funds for liquidity needs. In short, you will have to share the ownership of your company and meet the financial return expectations of your financiers. Investing in any business is risky for any investor. In light of that, you will need to show promising returns to cater to the risks involved.

Debt allows your business to grow without having to share your business ownership or use the cash (which is usually limited) already present in the business.

How to Stay Away from Bad Debt

Biriri suggests the following;

Do your research: Understand the loan products available to you for your business and compare to get the most suitable for your situation.

Understand the terms: What is the implication of taking a loan? What is the interest rate? Straight line or reducing balance? How much will you be paying and for how long? Is this something your business can comfortably support?

Pay off the loan as quickly as possible: There are several methods you can use to determine how to accelerate your debt repayment plan. Talk to a financial consultant if in doubt but be sure of the terms of the loan so that you can pay early without penalties.