For some small business owners, the word “debt” carries a bad connotation since it makes them think of credit card bills and unpaid invoices. Debt, though, isn’t always a negative thing. You may even take on debt as a business owner to finance the development and growth of your enterprise by requesting a small business loan, line of credit, or any other kind of financing.
Debt isn’t always a negative thing for business owners; in fact, you can take it on to finance your company’s expansion and growth.
When you take on debt in a calculated, planned manner, you are laying the groundwork for future success. Here are the top four benefits of taking on a business loan in Singapore.
1. To Grow Your Assets
The money you invest in your company doesn’t just vanish into thin air. If so, you might want to reconsider your spending. Each expense incurred by your company reduces the cash you have while boosting your assets. The fundamental idea behind double-entry accounting is this.
For instance, if you invest $25,000 on a new delivery vehicle, you will have that much more in equipment assets but less cash. Even while your assets will eventually lose value (that van won’t keep running forever), they will nevertheless add real value to your company and help you expand your sales to satisfy clients who want deliveries.
Because small business debt directly contributes to the objective of increasing the value of your company, the risk of taking it on through outside investment is frequently justifiable. You can expand sales in ways you couldn’t before thanks to the debt you take on. You can concentrate on your profits when you pay off that debt.
2. To Increase Your Marketing Efforts
Some business owners find it more difficult to grasp marketing investments, but many are immediately aware of how investments in real estate, machinery, and supplies can lead to positive debt. Even in a bookkeeping ledger, it is much tougher to see how paying a marketing firm is increasing your assets.
Employees, contractors, and marketing firms all add value to your company in different ways. They produce tangible assets, such as your website and social media accounts, that attract customers to your stores. They also design marketing strategies that advertise your company and its goods, boosting sales and building brand equity.
As long as you have a target ROI (return on investment) that you want to strive toward, you can take on decent debt to invest in marketing. For instance, you get a 10:1 ROI if you generate $500 in sales for every $50 spent on digital advertisements. To make sure you are making money from your marketing efforts, you may also keep track of the gross margin of the products you sell.
You can use marketing to increase sales, which will increase revenues and hasten the repayment of your debt.
3. To Improve Your Business Credit Score
Every company has a commercial credit score, commonly known as a business credit score. This rating measures how reliable your company is to lend to, similar to a personal credit score. You might have a small business credit score if your company is new or if you have unpaid bills. Due to this, it could be more difficult to obtain loans or credit cards, and the interest rates you are offered may also increase.
There are strategies to raise your business credit score over time, even though it can’t be fixed fast. Within a predetermined amount of time, you can repay loans and settle any remaining debts. This demonstrates to lenders your concern for your money and your ability to consistently adhere to a payment schedule.
If you have debt from several different sources, you might want to try to consolidate it. You might be able to obtain a loan to pay off these debts, reducing the number of payments you must make each month. Consult with a business loan broker or accountant first to see whether this is a practical strategy to strengthen your credit score and position your company for success.
Strengthening your credit score now will make taking on debt more affordable in the long run. Lower lending rates and more favourable repayment terms are available.
4. To Avoid Bringing On Shareholders
Beyond relying on debt, there are other ways to finance your business. You may, for instance, ask investors to participate in your company and recruit shareholders who will receive a cut of your earnings. These choices have gained in popularity recently as a result of the incredible venture capital financing allocated to finding startup unicorns.
Working with shareholders and investors, however, does not entitle you to free money. These folks frequently want to be involved in the choices you make in business. Investors will need to understand exactly how you intend to use their funds and what kind of returns they may anticipate. On your business taxes, you must also name your shareholders.
In some circumstances, it could be preferable to incur debt for your company without asking others to invest. As long as you repay a company loan in predetermined payments, you are free to do whatever you choose. With a company credit card, you have the freedom to make purchases without getting permission.
Additionally, borrowing money could be less expensive than receiving venture funding. Any interest you pay is deductible from your taxes, and business loans may have more palatable interest rates than private investments.
Plan a Strategy For Your Debt
You don’t have to stay away from debt. Your company may occasionally take on debt in order to grow or maintain longer-term control. You shouldn’t be hesitant to accept the challenge as long as you have a strategy for using the funds and a timeline for paying it back.
An appropriate debt-to-income ratio should be determined by your accountant after reviewing your balance sheets if you are thinking about acquiring any external financing. This approach will examine the total amount of debt you can afford to incur based on a predetermined monthly payment and offer you the assurance that you won’t be drowning in debt while attempting to pay your monthly operational expenses.