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6 reasons why debt needs to be part of your finance portfolio
It is a very common sight to see companies whether on large scale or on a small scale to struggle with cash-flow problems. Some companies hesitate in taking debts considering it to be evil. The relationship between Debt and cash-flow can sometimes be a little complicated but, it certainly is not bad for the company. Debt generally represents a state of the company with an inability to fulfill the funding requirements. It may have dire consequences even on your business if not repaid on time. But, it is always not the same. Like two sides of every coin, there is a good side of debt as well.
To a surprise, a majority of large companies have some level of debt. And, debt is even an integral part of the world economy. In such cases, debt is considered to be of benefit to the company. For small business debt when managed properly can actually provide some great benefits to the companies. A good debt leaves the small-scale as well as multinational companies with long-term benefits without leaving any negative impact on the overall financial position of the company.
Let’s take a look at the cases where debt comes out to be a good solution:
Debt is Cheaper than Equity
Debt-to-equity ratio = Total Liabilities/ Total Assets
Business can be grown in a number of different ways. The priority of expansion is to earn a higher rate of interest on capital than investing it in something else. It is expected and practiced to get a higher return on equity than the cost of debt. Moreover, debt lets the businesses to grow without diluting the ownership as banks do not require any equity while providing a loan.
Tax Deductible Interest
The other benefit of going for debt is the lesser tax rate. The cost of debt is pretty less on an after-tax basis. So, debt is beneficial in this way as well.
Debt Avoids Cash-flows within the Company
Maintaining a positive cash-inflow is quite a challenge for many small businesses. The amount of money with them is not sufficient to meet all the monetary requirements for the smooth functioning of the company. A well-thought amount of credit helps the businesses to continue with the trading, pay salaries and make new purchases. Debt financing helps companies to maintain a healthy level of cash-flow within and outside the company.
Builds up Brand Credibility
Debt helps business to make a new relationship with financial institutions and other debt holders and build a credible image of the business. When the payments are made on schedule then, it is more likely people investing and lending to your business as they acknowledge that it isn’t your first time. Debt also enables the businesses to expand their credit facilities.
Reduces the Risk
Borrowing money helps businesses to reduce the asset exposure in the case of failure thus, mitigating the risk involved. Debt is not always bad as in some cases like this, it saves the businesses from many risks involved.
Helps to grow the Business
The ultimate aim of businesses of all scale is to grow and to grow a sufficient amount of cash is definitely the foremost requirement. Many small businesses often find themselves at the crossroads when facing rapid growth. It is the biggest barrier in the steady and scalable growth of every business. Debt is the best and affordable solution to cash crunch within the companies. It is the most effective and affordable method of accessing the cash needed to pay the bills, salary, making new purchases and increase the marketing efforts. It increases the overall profitability of the company thereby, proving the decision of taking debt to be a successful one. Access to debt in such situations is a boon for the companies.
It is very important to properly evaluate the business requirements and circumstances before taking a debt. Making the sensible use of borrowed money to grow the business is the best decision a company or an individual can take. Debt is not always bad. It is good in cases where proper evaluation of the requirements is done prior to taking on debt.