Most people don’t get how people make financial decisions for a company. For one, even the ultra-rich are investing in businesses by taking out a loan. Some entrepreneurs make millions each year and still have debt in the bank. Why do they acquire debt when they can simply use their profits for every investment they make? Does it even make sense to acquire debt when owners can simply invest their own money?
The short answer is that in business, debt is not always a bad thing. For the most part, debt is worth it if you can use that money to generate more money in return. When you acquire business debt, you can invest in another venture, be able to pay the monthly dues and make more cash in the process.
But then, not many entrepreneurs got lucky in managing their debts. Some made really bad decisions paired with back luck that they had to hire a lawyer who handles debt settlement cases. Many lost their companies due to sky-high debt and file for bankruptcy, only to acquire another loan to start a new company.
So the question still stands. Why are companies still into debt financing even if they are making more than enough profit each month?
They Use Debt to Establish Business Credit Score
Your credit score can either help you secure a loan with the best terms, interests, or fees or not. One cannot build a business credit score without taking out small business loans. The more you build your business credit score, the higher your chances get in getting approved for larger loan amounts.
Know that entrepreneurs are better off establishing a separate credit score for their brand. For one, this physical separates them from their business. This, in turn, helps you better secure your assets in case your business fails to pay off its debt.
Establishing a good business credit allows you to finance business growth without using your own savings. Suppliers and vendors will gain confidence in you, enabling you to negotiate better payment terms. You can even lower the number of times to prepay for every item you invest in your business.
There Is Always Something That Needs to Be Financed
There are regular business expenses that every entrepreneur needs to address. But aside from recurring costs and expenses, there are other things they need to invest in. Your company might need new employees to fill in empty positions that require the best talents in the industry.
Your business could use another location to better cater to consumers. A piece of equipment might need a repair or replacement or a financial emergency that needs your attention asap. You might even need more inventories for your brand which can cost you thousands of dollars.
In business, your investments and expenses will never run out. If you exhaust your bank accounts or every income you make each day, you can end up with no emergency fund for your business. With business financing, you can expand and pay for your business needs while still being able to hold on to your revenue.
Debt Helps Mitigate Personal Risks
When you acquire a debt under the name of your business, you are freeing yourself from any obligation in case your brand fails to pay the loan off. If you have a bad credit score but the company needs funds, you can use your business credit score to gain the necessary financial help.
With a business loan, you won’t need to risk any of your personal assets just to secure the loan. You are reducing your asset against exposure by signing up for a loan not under your name, but under the identity of your business. This helps ensure you don’t get tied up in a financial mess and risk losing your assets, like your own home.
Remember that when you form a Limited Liability Company (LLC) or incorporate your business, you legally separate your business from the owner. Unlike general partnerships and sole proprietors, you get to safeguard your personal assets. Even if you file for bankruptcy, your LLC will just be out of business but you won’t be responsible for your LLC’s accumulated debt.
Your Debt Grows as Your Company Grows
It may seem ironic that a growing business acquiring record-high profits would opt to apply for another loan instead of using their earnings. But the reality is that businesses, even the biggest corporations do this. The growing business only translates to growing costs and expenses.
The unfortunate thing is, as you grow your business and expenses, you will need to should the overhead costs. You would have exhausted every revenue made before you even get paid back in return. This is why entrepreneurs need to make sound investments and risks to avoid serious business crunches.
In a nutshell, debt is necessary for running a business. Your brand can benefit from debt financing only if you keep in mind excellent debt practices. One should not borrow more than they need and can confidently say they can afford. One thing every entrepreneur should ensure is that their business never runs out of money.