When the average person thinks of debt, they imagine mounds of unpaid credit card bills, high interest car loans, and a 30-year mortgage that keeps them tethered to an unfulfilling job just to keep a roof other their head. For them, debt is a prison – something to be feared, and if possible, avoided. This is especially true now as the pandemic recession drags on. Everyone wants to hold tight to the money they already have and avoid taking on new debt. But in the world of business, that overly cautious strategy could hinder your ability to flourish in the long run. For businesses that want to thrive in recession, debt is good – if leveraged correctly.
Personal Debt vs. Business Debt
It’s important to make a distinction between personal debt and business debt. Personal debt is a line of credit (unsecured/secured loans, credit cards, etc.) used to purchase non-revenue generating services or products with the promise to repay the debt, plus interest, over time. On the other hand, business debt is a line of credit (unsecured/secured loans, credit cards, etc.) used to invest in some aspect of your business that can help you generate more income. Business debt is also repaid over time, with interest, but it is debt that will be paid indirectly by your customers – more about that later.
Right now interest rates are extremely low. As of this writing, interest rates for a business loan range from 2.58% and 7.16%. If you want to invest in your business (and everyone should), now may be a good time to consider taking out a low interest business loan from the Small Business Administration (or some other financial institution). Let’s take a look at five ways that you can leverage business debt to thrive during a recession.
Expand Your Business
Pandemic closures and restrictions have hit the economy hard, but a recovery is inevitable. To prepare your business for increased consumer demand, you might consider expanding into new territory. Want to open another franchise location? You can leverage business debt to fund your renovations, buy supplies, and to pay new employees. Don’t worry if your new location doesn’t generate a lot of revenue immediately, you can always pay off the loan with new revenue earned once the economy is back in full swing.
Market To New Customers
There’s only one thing just as important as sales in a business – marketing/promotions. If you want to stay in business and attract the right customers, you have to let the right people know you exist. But one of the biggest reasons that businesses don’t invest in marketing is that they don’t have the cash to do it. They also fear that their marketing efforts won’t pay off. Even for those smartest business owners who invest in marketing, it’s often the first budget line cut during a recession. That’s a mistake. Even if your existing customers are loyal, at some point they may no longer do business with you for a variety of reasons. This is why no matter how well you’re doing today; you must always market your business to new customers. And if you’re short on cash, a business loan or line of credit can help you fund your marketing campaigns.
Pay For Unexpected Expenses
No matter how careful you are with your business budget, there are always unexpected expenses. Having a business line of credit available can help. Here are some of the most common business expenses you may encounter:
As municipalities find themselves strapped for cash, they are looking for new sources of revenue. Some cities/towns are introducing new business taxes that could cost companies thousands of dollars a year. A business line of credit can help you pay those taxes immediately.
Major disasters like earthquakes and tornadoes aren’t the only calamities that can befall your business. Flooding, damage caused by a leaky roof or backed up toilet can deliver a surprise expense that your insurance may not fully cover. Having a readily available business line of credit can help you pay for that expense immediately.
Tech gremlins aren’t a real thing, but needing to fix technology that isn’t working correctly can cost your money. A business line of credit can give you quick access to the cash you need to hire tech support or buy new equipment or software.
Explore New Opportunities
Want to win big in business? You have to be willing to explore new opportunities. Taking on business debt can give you the financial flexibility needed to test out a new business opportunity without disrupting the cash flow of your primary revenue stream.
Prototype an idea (build a minimum viable product).
Create a test website.
Run test ads.
Hire product/service testers.
Use your business debt to determine if a new idea will really work.
Hire New/Better Employees
Every person you hire is an investment. You pay them a salary and they help generate money for your business. Even employees on the lowest rungs of your business can impact your bottom line. A surly cashier who hasn’t mastered the art of customer service can drive away patrons and harm your reputation. According to a study published by Forbes, poor customer service is costing businesses $75 billion a year. Part of the solution is to hire higher-quality employees. But that can be expensive, even in a recession. Fortunately, leveraging a business loan can help you invest in good employees and reap the financial rewards for years to come.
Personal debt can be scary and financially damaging, but business debt leveraged the right way can help you maintain and grow a healthy profit.
Franchise Attorney Nate Riordan
If you have any questions about franchising, please contact the experienced franchise and business law attorneys at West Coast Franchise Law today at (206) 724-0846 to discuss your situation.