Debt – it’s a fact of life for most. Debt however, is not always bad. In fact, debt can be used to your advantage. Most businesses do this every day. They avail themselves of a principle that’s been used to generate substantial wealth for years; the principle of leverage. Leverage means simply using an asset to generate a larger advantage than the asset itself provides. Business use this for many assets, not just debt. In fact, the the more proficient a business is at leveraging all it’s assets, typically the more successful a business is overall.
If one goal of a business is consistent, managed growth, debt is one of the most valuable tools at your disposal. As your business grows, you’ll need ever increasing amounts of various assets and payables, such as inventory, personnel, tooling, transportation, shipping and utilities, to name a few. As the need for such things increases on a monthly basis, few businesses are able to self finance the additional fiscal obligations, hence the need for debt if they are to grow.
The key is effective debt management. Advantageous credit terms should be negotiated with every vendor and creditor possible. Some vendors will offer cash discounts. In some cases these may be upwards of 10%. Such discounts will usually be stated in the the percentage discount you can expect to receive, followed by the number of days you have to pay on credit terms if you choose not to take advantage of the discount. Look carefully at the different discounts offered by your various vendors. Sometimes it’s more advantageous to take the discount, other times you should avail yourself of the credit terms offered.
As your business grows, you’ll need more of almost everything than you required the period before. In many cases, you’ll outgrow your credit limits with vendors. You may find yourself on credit hold for no other reason than you’ve exceeded your monthly credit limit. In such cases, if you have a solid record of on-time payments, you should renegotiate your credit limit. Most vendors will be willing to comply in an upward adjustment if your have been a good creditor.
One creditor that you’ll not be able to do much negotiating with is the government. Make sure you pay any taxes and fees due on schedule, else you’ll incur substantial fees, penalties and interest. Even if it means forgoing cash discounts with vendors, you have little choice other than to pay your taxes on time. They won’t go away. You may have to place a little call to a vendor and explain the situation. In many cases they’ll understand, especially if such calls are not a regular occurrence. Many otherwise profitable businesses have gone down the tubes due to failure to successfully manage their tax obligations.
You have some great tools at your disposal that you can use to grow a thriving, successful business. Debt management is but one of these, albeit one of the most important ones. Use it well, and the financial leverage it provides will be one of the most powerful business growth aids you can imagine.