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Should You Use Business Debt to Fund Growth?

By Spodek Law Group | February 20, 2024

Should You Use Business Debt to Fund Growth?

Potential Benefits of Using Debt Financing

Here are some of the possible advantages of using loans, lines of credit, or other forms of business debt to raise money to grow your company:

  • Retain ownership and control.
  • Tax deductions for interest.
  • Higher returns if successful.
  • Potentially easier to obtain.
  • Flexible repayment terms.
  • Ability to act quickly.

Risks and Downsides of Business Debt

Using loans and other forms of credit to fund growth also comes with considerable risk. Before taking the plunge, carefully consider these potential pitfalls:

  • Burden of fixed payments.
  • Risk of bankruptcy.
  • Stress and distraction.
  • Loss of flexibility.
  • Higher cost of capital.
  • Difficulty raising equity later.
  • Personal liability.

Key Situations Where Debt Funding Makes Sense

While the risks should not be taken lightly, debt can be an appropriate source of growth capital in certain situations:

  • Stable cash flows.
  • Clear path to higher profit margins.
  • Opportunity costs of waiting.
  • Tax considerations.
  • Low-cost flexible options.
  • Reasonable leverage levels.
  • Willingness to pivot if needed.

Key Tips for Managing Business Debt

If you decide to use loans or lines of credit to fund growth, adopting best practices to manage debt levels is crucial:

  • Conservative projections.
  • Monitor leverage ratios.
  • Only fund growth.
  • Build in buffers.
  • Tie debt to assets.
  • Match terms to use.
  • Reinvest conservatively.
  • Raise equity when possible.

Key Takeaways on Funding Growth with Debt

  • Taking on business debt can provide capital to fund growth plans but comes with considerable financial risks. Weigh the pros and cons carefully based on your situation.
  • Using leverage strategically makes the most sense for established companies with recurring revenue streams and clear opportunities to drive higher profitability.
  • Be conservative with projections, keep close tabs on key leverage metrics, and have contingency plans ready in case growth stalls.
  • Managing debt prudently by reinvesting conservatively, tying loans to assets, building in cushions, and raising equity when possible helps mitigate risks.

Additional Business Debt Resources

Reddit Thread on Using Debt to Fund a Business

Quora – How Much Debt is Too Much for a Growing Business

Avvo – The Legal Risks of Using Debt to Finance Your Small Business

FindLaw – Should I Finance My Small Business Through Business Loans?

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