As a small business owner, you may have done everything in your power to avoid taking on new debt. Debt, in fact, may be something that you believe could sink your business and take away from your profits.
However, sometimes taking on new financing can be one of the best entrepreneurial decisions you could make. When you use debt wisely, you can avoid these circumstances that could pose a greater risk to your company and your future than taking out a new line of credit itself.
Losing Equity and Selling Shares
Many business owners raise cash by selling shares of their businesses. When they need to improve their cash flows, but are reluctant to take on new debt, they often believe that selling shares is their only alternative.
However, when you sell shares, you essentially must accommodate your new shareholders and give them a stake in your company. They now will have a say in how you run your business, and you often must go out of your way to please them. Rather than let outsiders have a voice in the way you run your company, you can keep your equity and raise the money you need by seeking outside funding. This financing benefits you when:
- You want to retain total control over your business
- You expect enough future sales to pay off the loan satisfactorily
- You prefer to make finite payments on debt rather than give up permanent ownership of all of your company's shares
If you project that your company's revenue will be more than the amount of the loan itself, you would do well to take on this new debt rather than sell shares in your business.
Missing Out on Growth Potential
Even the most profitable of businesses can enjoy growth if their owners have enough capital on hand to take advantage of these opportunities. When you have the chance to grow your business, yet need some extra cash to make that happen, you would be well advised to secure funding instead of letting the opportunity pass you by.
If you are expecting a large return on investment, for example, it would make sense for you to take on new financing that you can easily pay off with your investment's return. In the end, you will have a company that has grown larger and now reaches more clients or is able to take on new projects while at the same time enjoying bigger profits, all because you used the money to grow your business.
Insufficient Inventory
When you choose not to take out an outside source of funding while running a cyclical or seasonal business, you risk not having enough inventory on hand and being able to serve your clients during busy seasons. In fact, seasonal businesses often must use financing to stay afloat during down times while also using money to buy inventory in preparation of busier sales seasons.
Rather than rely on the profits that you took in during your busy sales times, you can use funding to boost your cash flow and restock your inventory. You can settle the obligation with the profits from your upcoming sales and also avoid having to take from your company's bottom line or your own bank accounts to purchase the supplies you need.
Financing can be your greatest ally as you strive to grow your profitable business. When you want to avoid scenarios that could undermine your profitability and your future success, you should view debt as a wise investment rather than something to be avoided altogether. You can determine if or when to seek such funding by considering your current cash flow and your projected sales in the months and years to come.
