Running a successful business requires money. There’s no way of getting around it. You need money to buy inventory, supplies, pay utilities and other bills, and cover payroll. Don’t forget about taxes, too!
Even a business that’s making more sales than ever before can be in a position of needing to take on debt.
When Debt Is An Investment
Here’s a common scenario: Dave’s Custom Woodworking just received the largest contract in the history of the company. The math shows this one job alone will double profits from last year. The problem is, to fulfill the contract, Dave must buy materials in advance, and there’s a good chance he could produce the work faster if he upgraded his equipment. What should Dave do?
This is a prime example of when debt can be an investment.
When used strategically, debt can be a valuable tool for your business. If the debt you take on will ultimately result in a bigger return on investment (ROI), it might be a wise choice.
Before taking on debt, do your research and crunch the numbers.
- What is the debt going to cost you?
- Will your purchase give you more in return than what you’re putting into it?
- If you’re buying inventory, be sure you can sell all that you’re buying.
- What type of debt will be the best investment?
Choosing the Right Type of Debt
Not all debt is a wise investment. Choose the form of financing that makes the most sense for your needs.
A credit card typically has very high interest. Unless you’re paying the balance in full each month, it can be a costly form of debt and not a good option as an investment.
Loan or Line of Credit
A loan or a line of credit might be an option in some cases and depending on what you’re purchasing. Inventory or emergencies are common uses for these types of financing. See Why You Need to Diversify Your Debt for important information about lines of credit.
Factoring is a form of receivables financing that treats your outstanding invoices as assets. It’s not really a form of debt, but a financing option worth considering.
If you have an invoice for a product that has already been delivered or services that have been rendered, that invoice qualifies for factoring. Your business can sell these invoices at a discounted rate, allowing you to be paid when you need it most, increasing your cash flow without waiting for slow-paying customers.
When your cash flow is low because of outstanding invoices, factoring might be a good solution if you just need to cover payroll immediately, for example, but don’t want to increase your debt.
Lease financing, however, is an ideal choice as an investment for various reasons.
Financing a piece of equipment through leasing allows you to upgrade your products and services, streamline your processes, and increase production and profit while keeping your cash in the bank. With equipment lease financing, both your money and your equipment are working for you at the same time.
An equipment lease can offer flexible terms, such as skip payments, or a lease term structured around seasonal cash flow. Monthly lease payments mean you get to pay for your equipment in smaller, predictable chunks leaving you some margin in your monthly cash flow rather than buying your new equipment in one lump sum.
Lease payments can be treated as an expense and are usually tax deductible against your income each year of your lease term. Leases have no up-front costs of PST or GST. Taxes are paid on the individual monthly payments.
Don’t be intimidated by the idea of borrowing money to run your business. Explore your financing options and figure out how to use your debt as an investment to help your business thrive!