Consumers often have a negative view of debt, as a burden to be avoided. But if you run a small business, debt can be essential for growth. Business debt can allow you to take advantage of opportunities that you can’t finance on your own, for example:

• Fulfill large orders that you otherwise couldn’t fill
• Bring in new products or increase your inventory of existing products
• Buy a piece of equipment that increases your capacity or makes you more efficient
• Expand your marketing program to attract new customers
• Expand the space that you operate in or open a new location

If you can use the cash you borrow to generate a higher return than the cost of the debt and the interest, then there is a strong case for borrowing. In that sense, “leverage” is a more accurate term than “debt.”

Let’s take a simple example. Say your widget company receives a large order for 20,000 units. The client wants the order delivered sooner than you can manage, and at a unit cost that you can’t achieve. However, there is a $10,000 piece of equipment that would allow you to produce a higher volume of widgets at a lower unit cost. Using debt to purchase the equipment makes sense. If you end up paying $2,000 in interest, on top of the $10,000 loan, you’ll still be ahead by $8,000.

Debt for managing cash flow 

For seasonal businesses, of which there are many on Vancouver Island, debt can be useful for balancing uneven cash flow. Let’s say you have a summer busy season that is very profitable, with a winter season that is slow. It could make perfect sense to take out a loan in the winter in order to buy equipment, improve facilities or get your marketing campaign set up. You’ll be ready to operate at maximum capacity when your customers arrive, and then pay off the loan quickly with little accrued interest.

Be prepared to demonstrate your business case

Of course, you have to do the math to make sure the increased revenue will be more than enough to pay off the loan and the interest. Your lender will want to understand your business model and see your financial statements as well as your cash-flow projections, in order to assess your level of risk as a borrower. Even if your loan is secured by physical assets such as equipment or property, you as the business owner may be required to personally guarantee the loan.

Be prepared to demonstrate your business case

• Successfully managing debt helps you build your credit score, which allows you to get more favourable terms in the future
• The interest on business loans can generally be deducted to reduce your tax bill
• You keep full control and retain your profits, unlike raising funds by selling part of your business to an equity partner

As you can see, if the opportunity is right, debt can be a sound strategic choice to increase growth and profitability. 

When it comes to choosing a lender, keep in mind the value of local expertise. You’ll want someone that understands the local business market, and provides great service along with flexible terms and options at competitive rates.