Why entrepreneurs need to stop being afraid of debt (and learn how to embrace it)
It’s a common stigma in our personal lives that debt is bad and will weigh on our ability to succeed, but in the business world, debt is a very different responsibility than a personal credit card. In fact, Kevin O’Leary, the famous Shark Tank investor, says that business debt is essential to growth. But why? Let’s take a look at the reasons why business debt is here to help you grow.
Debt is Cheaper Than Equity
When you have the opportunity to choose between equity financing and a loan, always choose debt. When you choose equity, you’re losing ownership of your business, and when you give away the majority stake you’re no longer the one calling the shots. Having to consult with investors for every business decision becomes your new reality, and you may find yourself in a situation where your company is no longer what you envisioned.
On the other hand, when you choose debt, you’re on the hook for interest — which is a temporary cost that you can recoup with profits. No matter how much money your company makes, you don’t get those equity stakes back.
Interest is Tax-Deductible
Most business interest is tax-deductible, making debt an even wiser choice compared to equity funding. The IRS rules say that you can deduct interest on any business loans that you are legally liable for, that you and the lender intend to repay the debt, and that you have a true debtor-creditor relationship with the lender.
This includes prepaid interest, interest expenses for goods sold, and investment interest, as long as it meets the aforementioned criteria and it’s for a business expense. Check out IRS Publication 535 for this information in more detail.
Make Bigger Sales
If a huge sale is at stake, a business loan may very well offer a high ROI that makes the debt worthwhile.
For instance, let’s say that your laser etching company has a potential purchase order for $50,000, but you need a new $10,000 laser machine to churn out the product on time. You take out that loan and pay $2,000 of interest, which works out to a $12,000 total cost. You come away with a cool $38,000 in profits, exceeding the cost of the loan by far.
Without that debt, you would have turned away a massive sale and missed out on significant profit. In turn, your business would have missed out on a great opportunity for growth, as you can reinvest those profits into marketing, branding, or taking more high-volume orders.
The bottom line is, you don’t have to be afraid of business debt. As with any funding decision, you should be careful and make sure that any debt you do take on is calculated, necessary, and has a positive ROI value. But don’t miss out on opportunities to grow your business just because you’re worried about taking on debt. The right alternative financing solution gives your business the freedom to grow.