Many of my clients are afraid of taking on debt for their business needs. I want to dispel some of the myths about debt by demonstrating that debt can be a great way to take advantage of opportunities that will arise in growing your business - as long as it is managed properly!
I believe that almost every successful company in this country and around the world has used leverage to grow their business and resulting profits over time.
Here is an example of two businesses with different philosophies on the use of debt in their business:
Two companies, Business A and Business B, each earn $10,000 per month in profits. Both have an opportunity to win a large customer whose annual inventory needs of $120,000 that would double their profits.
Business A is debt adverse. It prefers to save its monthly profits until it has enough to build the inventory necessary to satisfy the needs of the potential large customer. Using this strategy, it wil take a year before Business A can compete for the business.
Business B is comfortable leverages its current monthly profits. Using its current earnings as collateral, it takes out a loan and builds the necessary inventory immediately. It will use the additional profits from the new large customer to re-pay the loan.
One year later:
Business A now has $120,000 in the bank ($10,000 per month for 12 months) and wants the big customer, but the big customer has gone to Business B and had a great experience. Now business A would have to cut pricing to win the large customer’s business.
Business B - has been earning $20,000 per month with sales to the large customer - less the cost of the loan (say $4,000 per month for an 8%, 36 month facility - life of the loan). It now has $192,000 in the bank and a satisfied, returning customer.
So, which business is better off?
Business B - due to financing the equipment - has earned $6,000 per month more than Business A over the last 12 months (or $72,000 in total). Not only does this business use the debt (through the new business win) to pay for itself, it has generated additional profits to find and fund new opportunities.
The upshot of all this –debt chosen carefully for the right reasons can allow your business to take advantage of opportunities that you'd otherwise have to pass up.
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