How to Use Business Debt to Strengthen Your Company

How to Use Business Debt to Strengthen Your Company

Some business leaders try their hardest to avoid debt, believing it’s always better to wait until they can pay cash for equipment upgrades or replacement, technology investments and growth projects. And while it may seem impressive to hear someone say that their company is debt-free, that philosophy may cause those companies to miss out on opportunities that would have helped expand their reach, accelerate their revenues or increase their market share.

For those who know how to use it, good debt can be a powerful tool for business growth. What is good debt? It’s debt you incur to drive revenues and strengthen your business, debt that costs less than it yields, debt that helps you reach your goals without compromising your cash flow.

Here are some tips to help you use business debt to your advantage.

Borrow for growth potential

When you consider taking on business debt, make sure it’s for a reason that will fuel your priorities and growth. Will the funding help you launch a new product? Expand into an additional market? Increase your customer base or sales? Elevate your efficiency, productivity or profitability? Take on a large-scale project that would otherwise be out of reach? Think about your company’s priorities and calculate your return on investment. If you stand to net more from taking out a loan than what you’ll pay for it (add principal, interest, origination fees and potential prepayment penalties), it may be a smart move.

Borrow only what you can afford to repay

The next consideration is determining whether you can comfortably repay your debt. Will you have sufficient cash flow to make on-time payments every month? Calculating your company’s debt service coverage ratio (DSCR), using the following formula, may help guide your decision:

DSCR = Net Operating Income/Total Debt Service

A DSCR of 1.0 means your income just covers your debt. Less than 1.0 indicates you do not have enough income to service the debt. It’s wise to look for a ratio of 1.20 or higher so you have a comfortable “cushion.” That’s the ratio lenders generally set as a minimum as they consider whether to lend a company money.

Aim to boost your credit score

Strategic debt management can strengthen your business credit score and profile, which may bolster your company’s growth down the line. Lenders and investors look to see whether you have a history of on-time payments and responsible borrowing before they commit to supporting your business, so build your credit by using loans, credit cards and lines of credit responsibly. Make every payment on time and, in the case of revolving credit, be sure to keep your balances low — under 30% of your total available credit limit. The U.S. Chamber of Commerce also advises that paying your suppliers early can help you earn the highest possible business credit score (certain suppliers may also offer a discount for early payments).

Choose the right financing option

How you borrow is as important as how much you borrow. There are a variety of financing options available, each working a little differently to help fulfill different needs:

A business term loan, a lump sum of capital to be repaid on a fixed schedule, is designed to finance long-term assets — a new building, equipment or vehicle, for example — or permanent working capital needs. Some businesses also use term loans to fund expansion and renovation efforts or consolidate higher-interest debt.

A business express loan may come into play when time is a factor. Speed of application, decisioning and funding can help you take advantage of time-sensitive offers on inventory, equipment and supplies, or react quickly when unexpected expenses arise.

A business line of credit also offers fast access to funding. It can be an ideal solution for managing cash flow gaps during slow revenue periods, paying for urgent needs such as equipment repairs and taking advantage of time-sensitive opportunities like stocking up on inventory before the busy season. Because it works like a credit card, a line of credit offers immediate access to funds, charges interest only on the amount you borrow and replenishes as you repay the balance.

Additional lending options include commercial real estate financing, to help you purchase, refinance or renovate a property; business vehicle loans, to get your team on the road; and government loans — Small Business Administration (SBA) and other loans offered through federal, state and local agencies.

Not sure which kind of funding may be right for your business? Dollar Bank can help. We offer both unsecured and secured loan options, competitive interest rates and flexible payment terms. Plus, you can set up automatic payments right from your business checking account. Schedule an appointment at your convenience with our Business Lending team to discuss your financing goals and needs.