Debt – A Good or Bad Thing?
The word “debt” often sparks anxiety, evoking thoughts of bankruptcy. Yet in business, debt is not all bad. In fact, when managed properly, debt is considered an essential tool for growth. Simply put, borrowing money lets you leverage a small amount of capital into a larger investment, accelerating expansion that might otherwise be impossible with limited equity.
The Upside. Fuel for Growth
Used for sound investments, debt can boost growth by providing funds to expand operations l without diluting ownership. Debt is often cheaper than equity as lenders accept lower, tax-deductible interest payments, while equity investors demand higher returns. Of course, debt adds immediate obligations with loans requiring regular interest and principal payments regardless of profit. But if that capital boosts earnings, the interest you pay should be much less than the profits you would give up to an investor. Debt can also instill financial discipline. Knowing you must meet repayment deadlines can prevent complacency and keep management sharp.
The Downside. Danger of Over Borrowing
Debt can turn dangerous if misused or excessive. Every dollar borrowed is a commitment that must be serviced and repaid. If revenue falters, interest payments can quickly squeeze your cash flow. Borrowing for the wrong reasons is also a recipe for trouble. For example, taking loans just to cover losses is a classic blunder that often leads to failure. Indeed, excessive debt is a leading contributor to business failures. Excessive leverage brings large interest costs, potentially volatile earnings, and a high risk of bankruptcy.
Debt is a double-edged sword. The same leverage that fuels growth can also magnify losses and even sink a company if mismanaged.
Striking the Right Balance
Ultimately, debt’s value lies in moderation and prudence. A moderate level of borrowing for genuine growth, backed by a solid plan, is not only safe but often crucial to reaching your business’s potential.
The key is to borrow within your means, ensure cash flow can cover the payments and keep leverage ratios reasonable. Equity is costly and scarce (whether from outside investors or your own pocket) for most small businesses, while debt is more accessible and affordable. Relying only on equity might mean giving up significant ownership or missing growth opportunities for lack of funding.
Bottom line
Debt itself is not “good” or “bad.” It is just another tool. Controlled debt can cook up success, while uncontrolled debt can burn you. Smart business leaders do not fear debt, they respect it.
By using debt judiciously, borrowing with a plan, investing in productive projects, and keeping leverage at reasonable levels, you can harness it to drive your business forward instead of letting it drag you down.
Reach out to me at SAS Business for a chat about your situation. My extensive experience in Banking means I am in a good position to give sound advice and support in this space.