Most people would be shocked to learn that there are tremendous benefits, yes, benefits, to being in debt. You see, business debt can be broken down into two types: manageable and unmanageable. The latter refers to debt you are struggling to pay back without endangering the survival of your business, whereas the former refers to debt you can safely chip away at on a regular or monthly basis as if it was just another automatic function of your business akin to producing quality products or services.
Manageable debt can come from small business loans or credit cards, both of which can be paid off at rates that will ensure a prosperous future for your business. Paying them off completely might seem like a good idea until you learn that the disadvantages far outweigh the short-lived advantages of having no debt at all.
Here are a few reasons manageable debt is much more of a strength than a weakness:
A high credit score doesn’t just come from making payments on time. You must also have an impressive credit utilization rate, which is based on how frequently you borrow money and how much of your credit limit you use. This is why people who only have one credit card and pay it off in full every month are unexpectedly hit with bad credit. If you have a credit limit of $100 and a statement balance of $20, your credit utilization rate would be 20%.
According to Forbes, a credit score of 780 or above is typically assigned to someone with a utilization rate of around 5.6%. A credit score below 600, on the other hand, probably belongs to someone with a utilization rate of 77.2%. Consistently paying off debt for multiple credit cards or loans will allow you to keep your utilization rate at a safe level.
You cannot build a high credit score without some sort of debt, whether it be from loans, credit cards, etc. You might not be thinking of taking out a small business loan anytime soon but a high credit score will come in handy when the time comes to add property or apply for a business credit card that lets you write off all those client dinners and business trips you’re striving for.
Say Goodbye To Tax Credits
Speaking of write-offs, the interest paid on small business loans is fully deductible on a business’s taxes. But this only applies to the interest on the payments you make, as opposed to interest on future payments. So if you pay your loan back early, you will most likely lose this potentially significant tax deduction.
Paying off a small business loan early also might not be the best idea if the loan does not amortize, meaning it carries fixed fees. For example, if you take out a $10,000 small business loan on a 12-month term, you might have to pay back $2,000 in interest and fees regardless of when you pay off the loan in full. So if you decide to pay off the entire loan by month 6, your APR would effectively increase from 20% to 40%, giving the loan a higher annual borrowing cost than before.
Many small business loan providers will even charge a fee for paying off a loan early. This fee is usually a percentage of the remaining balance, like, say, 1% of a $10,000 loan, or $100.
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Think of manageable debt as a secret weapon you just might need at any given moment. In the case of a small business loan, you are using your borrowed sum to run your business while focusing on increasing revenue. Your debt covers monthly expenses and acts as a safety net for any mishaps that might occur before business starts to pick up, like a broken piece of equipment. With credit cards, you are using portions of a large borrowing limit on a monthly basis.
If you were to pay off your debt with a single, lump sum of your own funds, you risk not having enough money to cover expenses during sudden yet inevitable dips in revenue that could very well occur in the not-so-distant future. Sooner or later, you will need access to a large amount of cash to expand or stabilize your business. And when you pay off a small business loan on time, there’s a good chance your lender will approve an even larger loan with better terms when you need it most.
Debt Responsibly With United Capital Source!
Still not convinced that debt can be used to your advantage? A conversation with a business financing expert at United Capital Source will undoubtedly do the trick. We can help you manage your debt month-to-month and develop terms that suit your individual needs. We will explain how our clients cyclically take out small business loans to expand their businesses or stay competitive during inevitable rough patches. Working with us will show you that consistently having debt to pack is a sign that your business is poised for growth and ready to take advantage of game-changing opportunities. If anything, we guarantee that once repayments are complete, you’ll never worry about or have trouble paying off debt again in your entire life!