7 Good Ways to Use Debt In Your Business
Many small business owners feel uneasy about taking on any debt. It makes sense — too much debt can quickly trap you and make it hard to stay profitable.
However, debt can be an incredible tool when you use it correctly in your business. The key is knowing what you will use it for and sticking to that plan. Doing so can create numerous opportunities for growth with minimal risk.
To that end, here are several good ways to use debt in your business.
1. Supplement Your Emergency Fund
2020 made it abundantly clear that businesses need plenty of cash stored away for emergencies. It can be the difference between keeping your employees paid and bills covered and going under.
However, more financial protection never hurts — but you don’t want to tie up more cash in a savings account.
Instead, get yourself a line of credit. These let you access as much credit as you need up to your credit limit — then, you pay back at your convenience (assuming you meet the minimum payment).
This makes it a great tool to use alongside your emergency fund.
Credit lines can also work for businesses slowly building their emergency funds but aren’t quite there yet. If something happens and you don’t have sufficient cash to cover expenses (maybe you already depleted your emergency fund and you’re rebuilding it), that credit line can bridge the gap.
Note: Not all lines of credit replenish as you pay them back. Make sure you read and understand all of your credit line’s terms before signing the paperwork.
2. Take Advantage of Supplier and Vendor Discounts
Emergencies aren’t the only urgent matter credit lines can help with.
Imagine your vendor or supplier is running a significant discount on the materials you need to make your product. Without a credit line, you’re limited to your available cash not tied up in other projects.
But with that credit line, you can get even more low-priced materials to load up on inventory at a discount. This will help you earn more profits after selling those products by cutting your cost of goods sold.
Just make sure you can pay back the amount you borrow on time and minimize interest costs.
3. Scale Up Successful Products/Services
Once you see consistent success with a product or service, you may consider scaling it so you can increase revenue and profits without a proportional increase in time and expenses.
Often, this means hiring more people or investing in new equipment — both things that debt can help with.
For example, you can take out an equipment loan to buy the equipment necessary to scale. With that equipment, you can pump out more of your products. The best part is that even if you have the cash to buy the equipment, using the debt helps you keep that cash around for other purposes.
As a result, you can scale up as you planned while having more funds available to take advantage of new opportunities.
Bonus: the interest on your equipment loan might be tax-deductible. Plus, you can generally write off depreciation.
4. Earn Cashback
Loans and credit lines aren’t your only debt options. Business credit cards are excellent tools for smaller, everyday business purchases — especially since you can earn cashback.
The key is to use the credit card only on regular purchases you have to make for your business. For example, you might use it to pay for any subscription software or office supplies. That way, you can safely earn cashback on your purchases without worrying about taking on too much debt.
5. Postpone Bill Payments to Bolster Cash Flows
When you spend with a credit line or card, you don’t have to pay its bill until usually a month after the statement cycle ends. You won’t have to worry about interest for that whole month in most cases.
This makes these tools perfect for paying suppliers and vendors because you can extend the actual payment deadline even longer.
Consider this: imagine a supplier gives you net-30 terms on an invoice, which means you have to pay the total balance within 30 days. If you wait until the 30th day and pay with a credit card, you now have another 30ish days before you have to pay that credit card bill (not to mention any cashback you might earn).
As a result, you can put off payments for nearly two months. That can do wonders for your cash flows, as long as you keep track of your outstanding invoices and credit card bills (something that good accounting software can help you with).
6. Refinance Other Debts
Do you already have some outstanding loans? If you’ve made timely payments since you took those loans out, your credit score (more on that next) may have gone up.
Consequently, there’s a good chance you can refinance and even consolidate those loans to score a lower interest rate.
This can save quite a bit of money on interest, depending on loan size. Plus, it could make your income statement look better by potentially lowering your interest expense each accounting period.
7. Build Business Credit
Lastly, and perhaps most obviously, using debt in your company helps you build business credit. As you raise your business credit score, you can access lower rates and better terms on future debts.
Additionally, vendors and suppliers may offer you more favorable payment terms, such as higher early payment discounts or longer payment deadlines. This can be a great help with cash flows.
Debt Isn’t Bad if You Use it Right
At the end of the day, debt can offer plenty of benefits, as long as you have a clear plan for using it. You only fall into a debt trap if you don’t set it aside for a specific purpose and monitor your debt usage.
A good accounting software solution like ZarMoney can help you track your debt usage and payments. Plus, the software can help you identify opportunities to maximize that debt. Try ZarMoney for free today!