It’s one of the oldest questions in the world; is it the right time to borrow? Whether you’re eyeing up a new property or you want to outfit your new business with some quality plant and equipment, it can always be a difficult decision to make.
At Fast Money, we’ve had discussions with thousands of people from all walks of life, so we’ve heard about every single argument for and against borrowing that’s out there. Here are three of the most common.
Borrowing is cheaper than giving up equity for new businesses
If you’re a start-up, it can be tempting to look at selling shares in your company as a way to raise funds for the necessities. Many organisations resort to this in the early days of operation, but the after-effects haunt them for years to come. Unless you can buy back those shares at some future date, that individual or group has a permanent stake in your business, giving them a seat at the table on all decisions. It will also affect your cash flow, affecting your profits now and into the future.
Borrowing money is a better fit because simply, it is a temporary process that fixes a temporary problem. You’re planning to make your business a success, so all quarterly and annual plans should begin with the idea that you will eventually be earning enough money to pay back your debt. Once you do, the debt is gone forever, and your equity remains intact.
Some investors may frown on a start-up with excessive debt
An argument against borrowing – only for businesses seeking investment – is that some particularly conservative or defensive investors may find excessive debt a turn-off. The definition of ‘excessive’ debt will depend on the individual investor, but any smart investor or venture capitalist will be considering the consequences of the business failing to meet a repayment. In a worst-case bankruptcy event, the lender frequently has priority over other stakeholders on the assets of the company, affecting the investor’s ability to recover some of their costs.
Where debt is small and manageable and the company has a proven ability to repay the debt, this will not factor in. It’s only where debt is considered to be excessive that this comes into play. Again, this will only affect businesses seeking additional funding through outside investors or venture capitalists.
Allow you to capitalise on opportunities as they arise
Most importantly, borrowing gives you an immediate lump sum that can be used at once. If you’re looking at opening a new location or snapping up some new machinery for a bargain, taking out a personal loan allows you to grab these opportunities the moment they appear. The long-term benefits of these actions can easily outweigh the cost of the debt, increasing your cashflow and allowing you to grow in ways you otherwise would not have.
For more information, start a discussion with a Fast Money consultant today.