You wouldn’t be here if you weren’t looking for ways to improve your cash flow. No business owner would turn down a good opportunity to do that. But, for a business that’s struggling under a large debt burden, you might be surprised to find out that a common solution comes in the form of more debt. Hear me out.
There’s bad debt and there’s good debt
You’ve heard it from our Treasurer. He probably heard it from someone who knows what they’re doing. There truly is bad debt and good debt. When a business is getting into debt trying to pay its bills—that’s bad debt. When a business is getting into debt while investing in its future—that’s good debt. For a business struggling with its finances, a delicate balance of the two often turns financial difficulty into a positive cash flow state.
Bad debt made good: debt finance
Most commonly, business owners go out looking for what’s called debt finance: money that comes from outside the business like a bank loan. While debt finance is extremely useful, it tends to be ‘bad debt’ for a business on the edge. When you borrow from a bank or a commercial lender, it becomes very difficult to spend money on growth projects while repaying the loan at the same time. Loan repayments usually start quickly after the loan is approved, and the loan has to be paid back in full within a certain time frame (unless you have a good negotiator on your side). There’s also the risk of losing your business or even your personal assets, since these loans tend to be secured.
That said, debt finance means a bunch of cash with no obligations outside of paying it back. You can deduct the interest from your tax, and there’s plenty of wiggle room around the timeframe over which it’s owed. So with careful consideration and planning, debt finance can be the boost in cash you need to take the next step.
Even better debt: equity finance
Less commonly, business owners will sink cash into the business from other stakeholders in exchange for equity, or ‘ownership’ of the business. It’s nerve-wracking, inviting others to the table, but this kind of money is the definition of good debt.
First of all, equity finance tends to be less risky—you don’t have to start repayments right away and you’ll have more cash to play with as a result. Secondly, with the right equity partner, you invite new knowledge and skills into your business. It’s true, you have new stakeholders with a say in how the business is run. But you have the money and the ability to focus on growth projects that will boost your cashflow in the long run.
The key is balance
The strategy here is to use debt finance options sparingly. They can help you focus on growth projects with enough planning, but more often they just buy you breathing room from your existing debts. Without care, these just become more creditors breathing down your neck. But, boosting your cashflow in the short term to seek out less risky sources of investment in the long term is a winning strategy with the right kind of planning.
If you think you’re ready to look at refinancing as an option to get your business back on track, get in touch with your accountant or preferred debt specialist now.