Last time I posted before the Holidays, I started talking about Inorganic Growth or buying a business. One of the things I pointed out was the use of an Small Business Administration (SBA) loan as part of the path forward. As I have worked with many businesses, I find them increasingly adverse to debt. They are proud that their balance sheets are clean of liabilities. I think to myself about the lost opportunity. I expect that many of you are surprised by that statement.
One of the things that has happened is that people misunderstand Business Debt from what I would preach them on Personal Debt. These work differently financially. I do not mean that you don't owe principal plus interest. I mean they accomplish different things.
Personal Debt accelerates the purchase of things that we want in our life. We pay interest for the purpose of having them sooner than we might otherwise have them. Most of the time we don't need these things. They are wants. They add nothing to our financial situation. There are exceptions. Most of the time a Home Mortgage can be a very good financial decision. This is not always true. However, the majority of the time you will have spent considerably less than renting.
On the other side, Business Debt is used to grow a Business or that is the theory. The term that we look at here is "Return on Invested Capital". You might be able to open a new location, purchase a more efficient machine, or hire a new Sales person. In any case, you should have a Business Plan that shows that you make more money because of the money that you borrowed.
Let me give you an example. I did some work with a Food Manufacturer that had Retail Sales. They were looking to raise equity capital. This was an established business and had a model that was working. Their plan for the money was to pay off the debt that the company had and open 1 new Retail Location. An alternate use of money would have been to open more locations. Another choice would have been to break into the Grocery Market. Yet another choice would have been to expand Online Sales. All of these latter choices potentially made the company more money.
And that is the point. Debt used properly in a Business should increase Cash Flow and Business Value. That is completely different than Consumer Debt. What would you do in your Business if you had enough money to do more?
Have a great day!
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