Debt financing growth business

Can You Grow Your Business with Debt Financing?

4 min read • Dec 01, 2021 • Lendio

Debt gets a bad rap sometimes. It’s often seen through the lens of personal finances, like a car loan that may get the borrower a functional set of wheels (or even a luxury sports car) but isn’t intended to make money. But business debt can work differently, particularly when it’s used to help spur growth.

How does debt help a business grow? Say your business borrows money to build a sales team, expand into a new market, or establish an R&D division. In this case, the debt is seen as strategic as it aligns with the business’s plans grow a new revenue stream. Like the auto loan, it’s still a matter of taking on debt, but this time the debt is enlisted for the business’s growth potential.

Borrowing Money to Make Money

Debt financing is simply the process of borrowing money to take on debt. Usually debt financing takes the form of a small business loan or a line of credit. While the dream situation for most small business owners is to use company-generated profits to drive future growth, depending on the stage of business or the breadth of the potential expansion, that may not be a practical goal. That’s where debt financing comes in. 

“Simply keeping a healthy expense account isn’t enough to retain an edge,” says Thomas Mello, a small business owner who used debt to grow his firm. By avoiding debt, notes Mello, “you may miss opportunities that require a financial investment [while] your rivals race ahead growing their slice of market share.” 

Or, as Wayne Gretzky said, “You miss 100% of the shots you don’t take.” 

Make a Debt Financing Plan

“Typically, when a business obtains debt or another type of financing, it’s for a specific purpose,” says Brian J. Sharkey, director of Audit and Accounting at Kreischer Miller. While growth alone seems like an admirable goal, it’s not enough to determine the potential for the debt. In other words, you need to start with specifics and a plan.

Before you apply for financing, consider what’s required to achieve your goal. Will you need new equipment, new facilities, or a bigger team? Will adding a new tech tool or software improve productivity for your sales department so they can close more deals? If the debt you’ll take on doesn’t directly support an income-producing initiative, it probably can’t be categorized as “helping you grow.” 

Additionally, consider your expected return for expanding your operations. When you put the numbers to paper, does your estimated return justify the expense? “Most companies will have a plan for what they are trying to accomplish,” says Sharkey. “But many fail to quantify the anticipated return.” 

See the Long-term Picture

By having a clear idea of how you’ll use the borrowed funding, you’ll also be able to get a better view of how long it will take before the money borrowed starts to show a return. In general, you don’t want to take out long-term financing for a short-term return. In other words, if you’re going to be paying back the loan for years, you want to make sure your ROI spans years, too. 

“A good way to look at this is to line up leverage with the assets you’re acquiring so the debt service period matches the time period you expect to receive returns from the asset,” Sharkey suggests. You may find that for a short-term expense or a one-time return, a business credit card is a better solution.

Find the Right Debt Financing Lender

There are a lot of financing options available and each comes with different terms. While your goal should be to consider as many offers as possible, it’s often easiest to work with a marketplace like Lendio, which offers a simple application process and helps businesses find the right financing for their specific situation. Additionally, you’ll work with a funding manager who can help you sort through financing options available for your business so you can easily narrow down the options. That way, you’re using the right debt for your growth goals, budget, and business.

 

Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

 

SHARE

Lendio

Lendio's team of experts is here to help you with every nook and cranny of your business. We'll make sure you have the best advice for financing, operations, management, hiring, and much more.