Debt: Propelling you forward, or sinking your business?

DEBT—a term that evokes both fear, and opportunity, in the minds of every business leader. 

Let us delve into the intricacies of funding, where we will determine whether the sourcing of funding serves as a formidable obstacle or a force for propelling business growth.

Optimise before you borrow

Every successful business understands that quality and efficiencies are the cornerstones of sustainable growth. Prior to sourcing any funding, management needs to ensure that their products are of the highest calibre and that their operations are generating the greatest yield possible. Resorting to debt without optimising internal operations is akin to building on shifting sands.

Key financial areas that are overlooked in terms of optimisation are:

• Utilisation of excess cash

Use excess cash reserves to repay outstanding debt obligations, provided that the return on the excess cash reserves is less than the cost of the debt obligation.

• Negotiations of payment terms

Exercise prudence in negotiations with suppliers and customers and ensure that the respective accounts receivable and accounts payable days are optimised.

• Enhancements to inventory management

  Streamline inventory processes to minimise waste and maximise efficiencies.

• Manage taxes

Navigate tax regulations with finesse. Ensure that all potential refunds are recovered, and that correct tax structuring is done to reduce any liabilities.

Considerations for taking on debt

As each business embarks on its debt-fuelled journey, it must tread the financial terrain with caution. Key elements, and underlying issues, upon which its debt strategy will rest are:

• Cost of debt

Interest rates:  Be cognisant of the prevailing interest rates, and the relevant risks associated with the interest rate linked to the funding that that your business requires.

Return on investment: Ensure that the returns derived from the financed ventures surpass the cost of debt.  This is a principle that distinguishes good debt from unmanageable debt.

Cost of raising debt: Know what other costs are affiliated to the debt that you raise.  Costs like registration fees, legal fees and various administrative expenses can catch you unaware and can be added to the total amount borrowed. 

• Repayment terms

Align the repayment schedule with the lifecycle of the financed venture, ensuring a harmonious balance between cash flows and debt obligations.

• Collateral

Evaluate the advantages and disadvantages of using collateral. Seeking alternatives to collateral could result in less favourable terms or exploring other financial instruments to raise capital.

• Flexibility

Seek out debt providers who understand your business and can be flexible during times of adversity.

Strategic use of debt

Once operations are optimised, management can strategically use debt. Business’ need to imagine debt as a potent catalyst that will propel growth when used effectively. Effective areas for debt utilisation include:

• Working capital

Funding/facility set aside to cover the day-to-day operational expenses of a business. It ensures that the business has adequate liquidity to meet short-term obligations such as payroll, inventory purchases, and utility bills.

• Growth capital

Funding for the expansion and/or development of a business. It provides the necessary capital to support initiatives such as market expansion, product development, or acquisition strategies, enabling businesses to accelerate their growth.

• Leverage finance

Financing investments with the goal of increasing the potential returns for investors.

• Tax benefits

Interest costs can be deducted from taxable income to reducing the overall tax liability of the business.

• Ownership retention

Funding is a means of raising essential funds without relinquishing control and safeguarding the vision and autonomy of owners.

Debt—when wielded with wisdom and foresight—can be a potent weapon in your business’ arsenal, propelling it toward the strategic visions of management. Debt is not to be feared, but rather embraced it as a strategic tool for facilitating the achievement of the objectives of each business.

At MattStrat, we stand ready to help your business manage their debt more effectively.  Together, we can find an optimal solution that works for your business needs.  

Disclaimer: The views expressed in this article are those of Marco Matteucci and do not constitute financial advice.