As a team of company rescue and corporate insolvency experts, we spend a lot of our time working with companies that need help addressing cash-flow problems they are struggling to reconcile alone. Sometimes we have to explain that debt is not always a bad thing.
The relationship between cash-flow and debt can be complicated. Generally speaking, any period of negative cash-flow from operating activities will lead to an increased reliance on debt. But while negative cash-flow is almost always a bad thing for a business, there is such a thing as good debt.
A good debt is one that represents a sensible investment for the financial future of your business. It is one that leaves the business better off in the long-term, without having a negative impact on your overall financial position. There should also be a specific reason for sourcing the debt, and a realistic way to repay it.
In this article, we’re going to take a look at a number of occasions when debt can represent a viable option for your business…
Debt is cheaper than equity
You can grow a business in a number of different ways. You could fund the growth using cash already in the business; raise the money you need from investors; or borrow money from a bank to inject new capital into the business.
Growing a business using cash already in the business can be a slow process. It is also not without its risks, as dipping into this money can leave you short when unexpected payments need to be made.
Equity is an expensive method of financing growth. Not only will you dilute your control of the business, but the investors will also expect healthy returns. Injecting money into a business is a risky prospect for an investor, so they’ll typically expect to see a return of at least 10 percent to compensate for the risks. Debt can usually be sourced at a much lower rate.
Debt lets you grow your business without having to dilute the control or ownership of your business or tap into that all important cash-flow. As banks do not require any equity when providing a loan, you and your shareholders will experience the full benefits of business growth.
Debt helps you speed up the rate of growth
Growing the business is the ultimate aim of almost all small business owners. The biggest barrier to growth is finding the cash required to achieve steady, scalable growth. Debt is an effective and often affordable method of accessing the cash businesses need to hire new employees, buy new equipment and increase their marketing efforts.
This injection of cash can also help businesses benefit from economies of scale. This reduces the cost per unit and boosts profitability, thereby making the debt a sensible business investment. Using cash-flow alone to fund growth means it can take a lot longer to reach this level.
Debt can help you avoid cash-flow issues
Maintaining a positive level of cash-flow is one of the biggest challenges small businesses face. Although many small businesses are profitable, the amount of money they make on a monthly or quarterly basis is rarely enough to fund growth.
Bad debts and late payments are leaving British businesses up to £16bn out of pocket, which is money they may never be able to recoup. If your business is struggling to fuel growth and get a head start on the competition, debt financing could be the answer.
An affordable line of credit gives your business access to the cash it needs to maintain a healthy level of cash flow and pay debts when they fall due. It can also help you avoid HMRC tax penalties that result from the late payment of your tax liabilities. Debt financing can also help you purchase supplies, pay employees and continue trading as normal when you’re strapped for cash.
How can we help?
Of course, while there are a number of benefits associated with debt, there are also serious risks. Our company rescue experts have turned around profitable companies that sourced too much debt too quickly. Those in riskier business sectors may also have a higher cost of debt, which can prove problematic.
At Jameson, Smith & Co., we can help businesses avoid cash-flow problems in the first instance, and source alternative forms of finance to help you grow. Please call 08000 746 757 for no-obligation business debt advice.