There is a type of business partner out there that never complains, never asks for profit share and dividends, is never late for work and doesn’t cringe at your choice of new car. And that’s not all… if you don’t like this partner you can get rid of it at a reasonable cost with no legal fees and there are no awkward accidental meetings later at the grocery store. Who is this prince of a partner? Well it’s none other than good old-fashioned debt. We’re talking commercial debt, not personal debt now.
Capital is the oxygen for business growth and it can only come from three places: Savings, Investors or Financing (aka loans, leverage or debt). Cash is king and using it for capital expenditures is usually out of the question. Investors can be hard to find and educate and usually want larger returns and major allocations of shares not to mention they often require, what many executives have called, babysitting. Anyone who has had to exit and investor will also tell you about the diversion of time, the stress and the expense. Debt on the other hand is much easier to find and obtain, can be suited to your cash flow cycles and doesn’t tell you how to run your business.
The reference here is to equipment intensive businesses, the types of companies where every piece of equipment earns its keep such as trucking, construction and manufacturing. Using leverage wisely can highly increase the return on equity and leave the owner(s) with control over the operations. In my experience the main problem is that business owners do not know all the options available i.e. where to obtain smart debt or how it should be structured to their advantage.
Debt is a tool. Use it to your advantage.
Debt has a cost. Make sure it pays for itself plus a profit.
Debt has rules. Know the agreement attributes before you sign and negotiate what you can.
Debt is not scarce. There are many types of lenders in the marketplace.
Some elements of this post have been oversimplified and of course debt, if used improperly or excessively, can cause major issues – but this is about responsible use. So let’s take a moment to appreciate debt as the time, tested and true capital source it is and recognize how this partner has helped millions of entrepreneurs start and grow businesses for centuries. Next time you sign a finance agreement have a little celebration with staff, friends and family and bring that agreement along – it won’t ask for anything and will show up read for work the next day. Hip Hip Hooray!