Is some debt good for my company?

Whether operating a small business, or large enterprise, there is a lot at stake for Canadian entrepreneurs. As a result, every financial business decision has either a direct or indirect personal impact alongside the organization. For many, the word debt has negative connotations and has become synonymous with increased risk, lack of cash flow, and the feeling of being crippled or beholden to creditors.

There are some instances, however, when debt, managed responsibly and effectively, can be a good thing. In fact, a large majority of companies have and maintain some level of debt. It can be an incredible tool for helping individuals realize return on investment, and fund projects and pathways that lead to sustainable, long-term success. 

Benefits of business debt

Support the growth of your business

Often entrepreneurs will face opportunities for rapid growth and find themselves unable to financially bootstrap the expansion. You may need to purchase or produce new products, access new equipment, or move into a larger commercial space. Fortunately, by incurring some debt, many businesses can capitalize on opportunities to meet increased revenues, profits, and business growth.

Grow your team

Recruiting and hiring additional employees is an expensive but necessary investment to ensure you have the scope of team to grow the business, in terms of both capacity and expertise. Business financing can help to ensure you have the right people in place to prepare your business for opportunities to come.

Build confidence and credibility

If a lender is willing to finance business projects or growth, it suggests that they have thoroughly gone through your plans and projections, and agree your business has potential. Further, understanding where you are, and a realistic forecast of what the next quarter or year could deliver, will give you a risk tolerance visibility and help you decide what level of debt you can safely and sustainably take on.

Take on less personal liability

Business borrowing will relieve you of some or all of the obligation to inject your personal funds into the business, reducing your personal liability and freeing up your investment capital for other opportunities when they present themselves.

Cash may be more affordable and available through debt than equity

Using cash flow from operations can be a major constraint or blockage in growing your business. It can also leave you short when unexpected expenses rear their heads. An equity injection may not be available and often is a more expensive method whereas debt can be sourced at a lower rate.

How does a lender make their lending decisions?

Banks and other institutions will make their lending decisions for businesses based on several factors, some of which are similar to their personal lending decisions (such as a credit score; however, business credit scores range between 0 – 100). A business credit report may include information such as number of employees, sales volumes, a summary of the industry your business operates in, and possibly banking report information. Additionally, using a risk scoring system can assist a lender in predicting the financial health of your company over the upcoming year.

This comprehensive business credit report sources information from banks, industry groups, collection agencies, and corporate registries to provide a complete overview to prospective and existing lenders of your business in their credit adjudication and other business decisions.

What kind of debt is right for my company?

There should be a careful evaluation of your business circumstances prior to taking on debt to ensure meaningful return on investment that truly supports and grows your business. It’s important to take the time to match your company borrowings to your operating and capital needs, and ensure your debt is allocated appropriately to each purpose. By developing a cash flow forecast for your business that incorporates working capital needs and longer-term capital purchases, you can work with your lender to build the most appropriate suite of debt facilities appropriate to your specific goals.

Identifying bad debt

At the end of the day, any debt absorbed by your business should first and foremost increase your future net worth at a lost cost. Any debt that reduces your future net worth, or puts it at an unacceptable level of risk, may be considered bad debt and should be avoided. This may include high fees or interest rates, inflexible repayment terms, or costs going to highly depreciating assets.

Addressing debt challenges

In today’s ever-shifting and evolving market, sometimes business falters and overwhelming debt becomes a reality. If you’re dealing with more debt than you can manage, or are struggling to keep up with financial obligations, our Corporate Insolvency team can help you address and overcome your financial challenges with strategies that not only align with your expectations but meet the needs of your stakeholders as well.

Together, through ongoing dialogue and the appropriate amount of debt, you and your lending institution can build a lasting relationship to assist your business in developing and strengthening a plan that maximizes its opportunities well into the future.