There's a major misconception that debt and borrowing are inherently bad, counterproductive, wrong, and downright dangerous for those who own small businesses. The truth is that the most successful entrepreneurs know the value of taking out loans, particularly when the circumstances are right. For many owners, planned indebtedness is the only way to expand their operations and earn higher long-term returns. Of course, taking on too much debt is not financially healthy.
But it can be equally unwise to view a loan as something to always be avoided, like poison or toxic materials. Like so many other techniques and strategies, borrowing has its place, even though a minority let the practice get out of control. What's the smart way to operate a small company? Borrow just enough at the right time for the right reasons. The same principle applies to your personal finances, which can have a direct effect on the health of your business. Consider the following reasons for taking on debt, each of which makes perfect sense when you approach the situation with forethought.
Covering Startup Expenses
The time when most entrepreneurs face financial shortfalls is during startup. That's to be expected because the operation has not yet had time to generate any cash flow. Most use private funds like savings accounts or turn to crowdfund platforms for smaller amounts of capital. Others take out personal loans to bootstrap a new entity. The lucky ones can bridge the gap between opening day and when the first wave of profits appears. From that point forward, financial survival is a matter of generating more capital than you spend. For startup expenses that exceed available savings and early resources, filling out an application with a lender is the commonsense way to go.
Sending Kids to College
While college loans are not directly related to the daily operation of your company, as an independent entrepreneur, you face major personal expenses that can impact overall financial solvency. Can you afford to plunk down a major chunk of money to cover tuition at a university or private college? Fortunately, there are excellent alternatives that don't involve using up all your backup capital. Private Parent (PP) loans give you the power to get competitive interest rates and attractive terms. The kicker is that your youngster will not have to face the prospect of graduating with a significant amount of debt.
When you take out Earnest private parent student loans, the contract is in your name and based on your credit scores, not your child's. College-age students rarely have the scores or credit history to qualify for decent terms or interest rates. The PP program gives entrepreneurs an efficient way to help their kids attend college, which is one reason they are among the best reasons to borrow money.
Purchasing Equipment and Machinery
Acquiring new equipment and machines is not always part of an expansion plan. Sometimes it's necessary to replace worn out components, repair old manufacturing machinery, buy the latest version of specialized equipment, get multiple tool sets for continuing operations, and more. Unless there's cash in the commercial bank account, this kind of activity calls for taking on debt. Luckily, there are lenders who provide streamlined financing for such purposes. They tend to offer competitive interest rates, standard industry terms, transparent conditions, and generous repayment periods.
Buying Fleet Vehicles
Commercial fleets rely on vehicles that are in top condition. For most entrepreneurs in the transport industry, that means either buying or leasing. Newcomers to the sector rely on leasing when they can't afford to buy or finance new trucks, vans, buses, and cars. For large transporters, a single truck can cost upwards of $100,000, so even a medium-sized operation might need several million dollars to acquire the vehicles they need to perform routine deliveries.
However, most fleet owners only lease until they are able to make direct purchases. That's because leasing, in general, is more costly than vehicle ownership. As is the case for buying equipment and machines, some commercial lenders specialize in financing transport companies that need to buy several vehicles at once. Without lending institutions, most transport firms would be unable to exist.
Acquiring Inventory
For large and small sellers, inventory is one of the most common reasons to spend money. Even manufacturers must acquire raw materials, while retail sellers tend to buy ready-made items. The accounting category called inventory is usually one of an organization's top three expense categories. For sale seasons and increased periods of demand, many owners turn to lenders to get the capital they need to load up on all the goods that make up their inventory stocks.
Financing Sign-On Bonuses
In many cases, the only way to afford talented team members is by offering financial incentives like sign-on bonuses. Some industries are known for high dollar offers, particularly in IT, consulting, engineering, and architecture. In other situations, modest bonuses might be sufficient. However, if there will be a dozen new hires within a short period, the sums can be substantial in any industry. If there's not enough cash in the corporate account to cover those incentives, view the expense as an investment and speak with a qualified lender to get financing. Good talent is hard to find these days.
Investing in an Office Building
There's no better reason to apply for a corporate mortgage than to take advantage of a solid opportunity like acquiring a small office building. The potential benefits are many, including the chance to have a good location for your company, rental income from other commercial entities that rent space from you, a better credit rating based on asset ownership, and more. Be careful only to consider getting involved in a major purchase like a building when you can afford to dedicate the necessary funds to financing, a down payment, closing costs, maintenance, insurance, and a possible period of no rental income during the first months of ownership. But in the long run, acquiring commercial property ownership is a major step toward significant growth and financial stability.
