Debt and managing your business

What role does debt play in your business?

Some entrepreneurs hate business debt. They want to pay as they go, never owing anyone. Others want to borrow every penny, never using their own cash.

Which is better? Bankers will tell you that the best route is somewhere in the middle.

Borrowing money can be a good choice if you can make a good profit and manage your cash flow. Suppose a company gets a contract for a big project. The owner can either buy the materials up front for cash, or it can use the line of credit (LOC) it has arranged with the bank, preserving cash for payroll and other regular expenses. When the customer pays the bill for the completed project, the business can pay down the LOC and keep on rolling. Yes, the bank will collect a little interest, but the peace of mind of easily meeting payroll is worth every penny.

Paying for everything in cash means that a business has less in reserve. When a customer delays paying on an invoice, there’s no money to cover the day-today expenses. This jeopardizes the future of the company.

When is a good time to get a line of credit? The usual answer is, “Get a line of credit before you need it,” which is easier said than done. So the real answer is, “Get a line of credit as soon as the bank will give it to you.” Having an LOC is a security blanket. It gives peace of mind because it offers protection from unexpected situations. A seasonal business also benefits from a line of credit. Buying inventory before the selling season is an excellent use of an LOC.

Using debt to manage cash flow has another benefit. A banker cares about “free cash flow.” That’s the money left at the end of each month after you meet all of the financial obligations for the business. It can be difficult to balance debt vs. cash flow but it’s an essential part of running a business successfully.

Let the consultants at the Louisiana Small Business Development Center at McNeese State University help you with the difficulties of running your small business. For 35 years, the LSBDC at McNeese has worked with entrepreneurs and business owners who are looking to start or grow their small business. Visit www.lsbdc.org/msu to learn more about us. For no-cost assistance with your business, call 337-475-5529.

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Funded in part through a Cooperative Agreement with the U.S. Small Business Administration and Louisiana Department of Economic Development. All opinions, conclusions or recommendations expressed are those of the author(s) and do not necessarily reflect the views of the SBA.

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Donna Little is the director of the Louisiana Small Business Development Center at Mc-Neese State University. Contact her at 475-5945 or dlittle@lsbdc.org.