How to Make Debt Work for Your Business Used wisely, debt can be a good addition to your books.

By Jeff Wuorio

For many small businesses, debt is truly a four-letter word -- not that it has mattered lately since lenders have been downright Scrooge-like about extending credit of any sort.

But now the purse strings seem to be loosening. And, say experts, going into debt can be a prudent decision for many small businesses, provided it occurs under the right circumstances.

Indicators suggest small-business credit is on the upswing. In a recent survey of 159 financial institutions by Sageworks, a Raleigh, North Carolina, financial analysis company, more than 50 percent said they planned to increase their commercial lending to small business. (By contrast, only 11 percent said they plan to cut back.)

"I can tell you that we don't foresee an issue with small businesses obtaining financing this next year," says Philip Chang of Carbon Publicity, a Chicago media firm that assists small businesses with finance issues. "Banks are expanding their lending capacity at a rate we haven't seen in a very long time."

Get a great deal on your debt

One obviously attractive feature about taking on debt is the cost. Interest rates are scraping rock bottom, making the expense more affordable not only for small businesses taking on debt for the first time, but also for those looking to retool existing debt.

"Since interest rates are at an all-time low, that makes debt less expensive in real terms," says small-business financing consultant Charles Green. "Refinancing existing obligations for lower costs can quickly impact the bottom line of most businesses."

But skinny interest rates alone don't mandate a mad dash to the bank. Green cautions against taking on debt in hopes of righting a small business that's struggling. While the infusion of cash may offer a short-term boost, subsequent revenue may prove insufficient to meet repayment obligations: "The right conditions would include a healthy business that remains appealing to their bank's view of a prudent risk, has positive trailing trends and has good prospects for continued growth."

Nor, for that matter, are banks turning a blind eye to small businesses looking for debt to stabilize volatile finances. Although lenders are being more generous than they have been in the recent past, their most attractive candidates remain businesses with a history of solid finances and an eye on growth instead of on patching financial leaks.

"Banks are looking for those businesses that are well managed and have proven this by adapting as necessary to their evolving situation," says Craig Calafati, senior vice president of national sales at Celtic Bank. "This means having maintained necessary liquidity, close supervision of expenditures, and any other measures taken that show a good understanding of the current business climate."

Approach debt with caution

Even healthy businesses should exert caution when it comes to considering debt. Rather than assuming large debt in hopes of spurring major growth, Chicago certified financial planner Julie Murphy Casserly suggests just the opposite -- a debt load that will be manageable even if conditions take a turn for the worse. "Decide what you can afford in a payment that still gives you wiggle room if sales decrease like they did in 2008 or 2009," she says.

If circumstances and your financial prospects are solid, consider next what form of debt might work best. As a rule, Casserly encourages fixed-rate loans. Fixed rates are historically appealing since any possible interest-rate movement is taken out of the equation. That makes growth and loan-payback planning much more reliable.

Although long-term loans may seem the most obvious choice, Green suggests investigating revolving lines of credit as well. They offer greater flexibility in terms of accessing cash and subsequent payback. The caveat is that they're best suited to businesses with a reliable cash cycle and a focus on using the funds for a specific purpose rather than trying to generate a cash cow. Without a predictable cash cycle, making payments can prove dicey.

Is now a good time to go into debt?

Happily, though, in contrast to past years, it's a buyer's market for small businesses eyeing some form of debt. Take some time to shop aggressively to compare loan costs, interest rates and other terms. In particular, Casserly says small businesses should start with local, community-based banks. Their loan terms may be particularly attractive, not to mention these lenders' interest in backing local small businesses.

But don't be the overzealous kid in the candy store. Keep debt to a minimum, shop to find the most affordable deal you can and make certain that the debt you take on is manageable. Says Calafati: "If the business feels they have effectively weathered the storm and have made adjustments to their particular model that will provide the financial stability necessary to service the new debt, then, yes, it is an excellent time."

Wavy Line

Jeff Wuorio is a veteran freelance writer and author based in southern Maine. He writes about small-business management, marketing and technology issues.

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