Why Debt Can Be Good for Your Business Jul 12, 2012, 9:19 am By Emily Haleck

Guest post by Dale Gunther

Someone once said, “Debt is a useful servant but a ruthless master.” In my business and personal life, these words have stuck with me and I have always been careful in taking on debt.

Back when I was a young business man and was planning on expanding my business through a loan, I remember consulting with my banker, Glen Anderson. Despite being in the business of lending money, Anderson’s first response was one of caution: Did I really need to take on this debt? As I spoke with him about my plans and he could see I had analyzed the risks and rewards carefully, and that I had a solid secondary source of repayment should the worst case happen, he helped me plan the loan terms that would result in the best outcome for my business. In this case, the loan ended up being a smart choice that did indeed help my business grow and succeed in ways it would not have had I not taken on some debt.

In the shadow of the Great Recession, though, we are ever more aware of the disastrous effects debt can have on both individuals and businesses. Too many people lost their homes or businesses when cash flow tightened, and many weren’t prepared with the financial reserves necessary to get through those rough patches.

So why would anyone ever argue that debt is good?

Because it can be, at least for a business. For healthy, stable companies, debt can often be a good decision when it helps a business expand or increase the bottom line. Here’s how debt can help a company get ahead:

Rate of return: Sometimes a business can make a better margin investing borrowed money than what it is paying in interest for that borrowed money. This is why some businesses take on debt even when they can afford to pay for their expenses. The leverage the borrowed funds provide allows investors to have a greater return on their money.

Less expensive than equity: Debt is a much cheaper and less risky form of financing than equity.

An investor typically wants a return of 10 percent or more through aggressive growth, while debt can usually be found at a lower rate (particularly today) without strict growth plans.

Interest rates: There’s hardly been a better time to get a loan when one looks just at interest rates, which remain historically low. This makes debt more affordable. And don’t forget that these rates don’t just apply to new debt; refinancing existing debt at a lower rate can make a real difference in a company’s bottom line.

Tax breaks: The U.S. government allows businesses to deduct the interest on debt from their corporate income taxes. At a rate of 35 percent, a business can see its net cost of debt much lower than the actual interest rate after considering the tax break associated with interest.

So what kind of debt is best for your business? There are a variety of commercial loans available to small-business owners, including fixed-rate loans and revolving lines of credit. Fixed-rate loans guarantee the same rate through the life of the loan, so you don’t have to worry about an increased payment if interest rates begin to reverse. Revolving lines of credit may be a good option for businesses with a predictable cash cycle because there is more flexibility in accessing cash and paying back funds.

As always, your community banker can be a wonderful resource in providing guidance so that any debt you incur can become a “useful servant” rather than a “ruthless master.”

Debt is not the four-letter word some make it out to be, as long as your company is financially sound. Just be sure any debt is manageable so that in the event of a down business cycle, you can still afford the payment. If you feel your company has effectively weathered the economic storm and has the financial stability necessary to service new debt, then now is an excellent time to talk to your community banker about taking on additional debt to grow your business.

Dale Gunther is vice chairman of the board of People’s Utah Bancorp, the holding company for Bank of American Fork, which is an SBA-Preferred Lender, Equal Housing Lender and Member FDIC. At the start of his 16-year tenure as CEO at Bank of American Fork, the bank had two branches and $80 million in assets; it now has 13 offices and more than $880 million in assets. Dale has served as chairman of the Utah Bankers Association and currently serves as an American Fork city councilman. This article should not be considered legal or investment advice. Seek legal and investment advice from your own qualified professional.

This entry was posted in Business, Debt, Guest authors, Loans, Real estate. Bookmark the permalink.


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