A friend of mine works for Sertant Capital, a company which lends money to businesses who are looking to upgrade their equipment. Something which we were discussing recently has been the collapse of so many businesses as the result of Covid and the subsequent lockdown. Interestingly what she was saying about these businesses was not so much that they had to close down because they could no longer trade, but rather because they had taken on more financial risk than they should have done. This is a common sight in business and it is a dangerous way to operate for any company.
There are certain conditions under which you should borrow money for your business, and these are the conditions to look out for.
Consolidating debt is where you borrow from a single lender to pay off other debts which you may have, this process is also used to gain better terms of a loan and then pay off a loan where you may be paying higher interest or monthly payments. This is a smart idea if you have found that you need to get a better loan for your business which allows you some extra wiggle room.
If you are not consolidating then you should always seek to ensure that you have no debt in the business before you look to borrow money. Those who borrow because they are struggling, yet have debt in other places, they are often the businesses which are doomed to fail. There is only so much borrowing which a business should do, and that is why it is important to have zero debt before you take on anything extra.
People often kid themselves that if they are able to borrow money then they can generate higher levels of income which will then be able to pay for the debt which they are taking on. This is a terrible business strategy and one which will only result in the business facing unnecessary pressure and stress. Now there will be money borrowed which is of course dedicated to the generation of more wealth, but businesses cannot take on high levels of debt on the basis of hypothetical income. Always be sure that you can afford to pay whatever it is you are borrowing, based on your income right now.
The only time when you should look at borrowing money when you do already have some debt is in an emergency situation. For example after the events of this year there are going to be some businesses which have to borrow emergency funds in order to keep their heads above water. There are also other reasons for emergency borrowing such as a business crisis or an incident which an insurer won’t pay out for.
Debt is both necessary in business and the reason why so many businesses fail, the trick is making sure that you are able to strike the balance between what is too much and not enough.