Dear eCommerce Businesses; Debt isn’t a Dirty Word.
Debt isn’t dirty. And being a business in debt isn’t a bad thing.
There, finally someone said it.
Perhaps it’s the language surrounding the word ‘debt’, but something or someone has taught us that borrowing money is something to avoid. A quick Google search defines “debt” as “the state of owing money”, with the use-it-in-a-sentence example being “the firm is heavily in debt”. Synonymous with liability, owing money, and late with payments, the word “debt” is enough to raise anyone’s heart rate.
But hang on.
Perhaps we need to steer clear not of debt, but of its negative connotations. Misunderstandings surrounding debt, what it is, and what it’s for, is actively costing small businesses. Did you know that, according to GLI Finance, British SMEs lose out on £20 billion a year from lack of knowledge of alternative finance?
Smart founders recognise that a certain amount of debt is absolutely necessary to the efficient running of their businesses. Whether it’s used to free up cash-flow, to hire new recruits, or to create new products, debt is the sign of a healthy business. Further, with 60% of UK small businesses going into the COVID pandemic with £5000 or less in credit balances, it’s clear that debt can be an invaluable tool to survive hard times as well.
So whether you’re weathering out the Corona-storm, or actively looking to grow, debt can provide the capital needed to achieve your goals.
And, as the saying goes: “It takes money to make money”.
Here are 3 reasons why debt is good for your online business.
- Debt is Cheaper than Equity
When looking to raise larger amounts of funding, you’ll likely be deciding between debt and equity. One of the key benefits of debt is that, in the long-run, it’s cheaper than equity. While equity requires you to give up part of your business in exchange for cash, debt falls away once the money is repaid, with no need to give up ownership. Financial wizards refer to the concept of “leverage”. Because you only repay exactly what you borrow (plus interest), all the additional value you create in your business from investing the money accrues to you - no sharing it with other shareholders! In this way, debt supercharges investment returns. You can borrow £10,000, use it to increase the value of your business from £100,000 to £200,000, and that appreciation is all yours.
- Debt is Tax Efficient
Debt is helpful because interest repayments are tax deductible. This means that debt becomes even cheaper compared to other funding options. Let’s break this down further by using an example:
Imagine you borrow £100,000 at an interest rate of 5%. This means you’re paying £5000 in interest, in total. This £5000 expense can actually be taken off your company’s taxable profit. So, if the corporate tax rate is 20%, you’ll actually make a saving of £1000 in tax (20% of £5000). In fact, the true cost of the debt drops to 4% where this rate is found by using the formula: cost of debt = interest rate x (1 - tax rate)
(Confused? TL:DR? Basically, because interest is tax-deductible, you’ll save money when paying it back, compared to other funding sources. Woo hoo!)
- Debt can be Tailored to your Individual Needs
Need to facilitate growth, or smooth your cash-flow? No worries. Grab some debt, get some capital, navigate that slow season, or stock up before the busy one. No personal guarantees available? That’s fine, there are options for you. Need the money right now? Debt can move as fast or as slow as you want. Want flexible repayments? Those options exist too!
With many lenders now offering flexible repayments, debt is even more workable than ever before. Flexibility? Cheaper rates? Retained control over your company? Debt is clearly a useful choice. Loans, like businesses, come in all sorts of shapes and sizes, and there are many, many lenders out there. If you need it, chances are, someone provides it. All you have to do is find it.
And that’s where Business Score comes in. Send Rich an email (firstname.lastname@example.org) to see how we can help you find the perfect, workable debt.
But, most importantly, if you take away only one thing from this article, it’s that when used correctly, debt is a friend not a foe.