If you’re a small business owner, you’re probably well aware that there are times when it helps to have extra cash on hand. Hiring a new employee, adding inventory or buying new equipment all require surpluses of available capital. These are important, sometimes necessary, steps to growing your business, but they’re often difficult to do when funds are understandably tight in a small organization.
So, what’s a business owner to do?
Debt financing is a popular option, and with the availability of “easy cash” loans online, they are a tempting offer. Debt financing is simple and it’s straightforward, and as some advertisements boast, you can be “approved in minutes.” But is it really the best option for your business? Every business is different, so it’s important to thoughtfully consider all of the implications of the credit line you are considering. These are some of the pros and cons to keep in mind when considering debt financing:
PRO: Quick Access to Capital. Obviously, the main benefit of many types of debt financing is that you can get capital very quickly in a pinch. From credit cards to bank loans and peer-to-peer lending, you can put that money to work quickly.
CON: Disruptions in Cash Flow. Taking on debt financing means having to service that debt, and that can be overly burdensome for some businesses. It will depend on your situation and how the debt is structured, but most credit lines require some kind of monthly service to stay in good standing. This can affect your cash flow, especially if your business has seasonal highs and lows.
PRO: Tax Deductions. In a number of cases, you can classify principal and interest payments as business expenses. These can then be deducted from your taxes.
CON: Slow Customers Become Extra Costly. Do your customers pay on time, or do invoices sit for 30, 60 or even 90 days before you receive payment? If it’s the latter, the irregularity in your receivables could cause additional disruptions to your cash flow.
PRO: Quick Returns on Variable Costs. Putting your debt financed capital toward a fixed cost like a piece of equipment likely won’t produce an immediate return. However, using it to finance additional inventory or materials can bump up your income and offset some of the disruptions in cash flow you might experience from debt service and receivables.
CON: It’s a Credit Risk. If you have the credit to get financed, your business’s credit will be affected for the life of the credit line and you’ll have difficulty getting further financing. Should you miss payments or default, it will greatly impact your chances of getting financing in the future.
In many situations, using debt financing can be a great way to make a purchase or a hire that can be the catalyst to grow your business. But taking on debt is risky, and there are alternatives available for businesses that would prefer a more conservative approach to financing. Accounts receivables factoring is a means to getting access to capital, without taking on the burden and risk of a credit line. Your capital comes directly from your invoices, so your cash on hand can grow as your business grows.