When you think of a business loan, you probably think of debt and how it adds to the company liability. In truth, when evaluating a company, its debt load is an integral piece of its valuation. Too much is not good. It’s money you owe and must repay.
When you are in business, a loan can have a different meaning. A business loan or line of credit is not considered debt but rather a return on investment.
But how can that work?
Business Loans For Wealth-Building
A business loan can generate cash flow for your company, and it occurs by using the funds borrowed effectively. The first step is to determine precisely how you’ll use the money and stick to it.
Next, you’ll need to do some calculating. If you take a business loan at a 12 percent interest rate and your business generates a 15 percent gross income, you’re already ahead of the game. Say, for instance, you need to take a loan or line of credit to move to a new location with more foot traffic. You can project a 1-3 percent increase in sales. Hence, you’ve created wealth, not debt.
Loan Or Line Of Credit?
A business loan can work as a wealth-builder as long as your monthly gross income is more than your monthly interest payment. Paying down a loan over the term’s length will still generate income but at a lesser rate. You can always pay off the loan early, but before you do, make sure you’re aware of any early payoff penalties.
A credit line provides more opportunity for a higher return on investment because you can pay it off with your profits and use the funds later to reinvest. A line of credit gives you more access to working capital by making payments in advance. By paying down more than the minimum, much like using a credit card, the more you pay down, the more available credit you have.
Negotiate With Suppliers
Having a loan or line of credit gives you cash flow and leverage to negotiate lower prices with your suppliers. The ability to pay cash provides your suppliers with immediate cash flow, and most are willing to discount their cash sales rates. Doing so gives you more spending power, and your loan is working for you in more than one way.
Don’t Borrow More Than You Need
It can be tempting when a lender offers to loan you more money than you need. Resist the temptation and stick with your original amount. Keep in mind; you must pay it back. The longer it takes and the higher the payments, the more you jeopardize your return on investment.
With proper planning and careful budgeting, your business loan can help you to build wealth. In business, it should not be viewed strictly as debt, per se, but rather as an investment for growth in your business or industry.
Whether you borrow from a bank or other type of lender, it is capital for your company’s future.