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The Threat of Debt

Thursday, May 21, 2015   By Mike Reddy

 



As you may have noticed, it takes a great deal of capital to launch your business successfully.

The thing you might not have realised, until you needed it, is that raising capital may be one of the hardest battles you’ll have in getting your business off the ground.

Great care must be taken in your planning, particularly if raising capital involves going into debt. In all likelihood it will, so the focus must shift from the threat of debt to the management of debt.

You can manage debt whether you have some left over capital from your launch or whether you borrowed more along the way to finance the growth of your business.

Since the other option for raising capital is equity, this can present two major problems – the value of your business is subjective - meaning it is likely worth more to you than to the investors you may attract and it will mean you are unlikely to retain the same control over your company. 

This of course makes debt the better option as long as you manage it well.

Debt is secured by your company’s assets often with your personal guarantee of repayment. Your company repays the principal with the interest from your cash flow.

The lender won’t be accepting any huge risks and you can retain complete ownership which means you are able to continue the operation of your business as you choose.

You’ll also get considerable tax deductions on your company’s income taxes which is beneficial to the bottom line and in essence lowers your effective interest rate on the debt. 

Realistically, debt management begins before you attempt to raise capital. You should start by assessing your needs and creating a strategic plan.

You don’t want to raise too little capital that you need to ask for more too quickly and you certainly don’t want to overshoot by so much that the debt is overwhelming. Once you have entered into the debt and have the working capital, revise your budget cutting out excesses. 

Remember to market your business effectively.  After all, more clients mean more cash flow to manage the debt. And choosing to use debt wisely and managing that debt intelligently will ultimately improve the chances of your company being successful.


Mike Reddy is a Chartered Accountant, business coach and advisor helping businesses in Sydney, Melbourne, Brisbane and Gold Coast to easily increase their profits and cash flow. He is currently President of the North Sydney Chamber of Commerce, a Regional Councillor for Sydney North East and a member of the Institute of Chartered Accountants Sydney leadership team. As well as advising businesses, Mike presents business development seminars and webinars and is regularly contacted by the media to comment on small business matters. You can connect with him on Facebook, Twitter and Google+.