Good companies need debt to grow

Adam Orlin, Head of Investec Import Solutions

Debt is often positioned as a bad thing. And while this might be true to some extent, small businesses, and in fact business of all sizes, can utilise this as a great tool to grow. So let’s examines how this might not necessarily be a contradiction of terms.

Think about it. You have want to start a new business. Unfortunately, the current economic climate means you do not have enough cash flow and cannot raise equity. Enter the world of managed debt.

Managed debt can be one of the most cost-effective forms of financing available to a growing business. A company that is stable and well-established, and has both assets to borrow against and the cash flow to service the loans, can utilise this form of debt strategically.

Managed debt should not be feared, but instead viewed as a tool that can help grow a business. This is often designed for low-risk situations so the finance capital specialists has the peace of mind that it will get the repayments and the business owner has access to one of the most cost-effective forms of financing around.

If the debt is not repaid, the bank can sell an asset belonging to the business to get the required funds. But does this not merely add to the pressure of a business-owner who already is in a challenging environment trying to ensure growth and make a profit?

Not necessarily, when factoring in a steady cash flow and the income generated from the future sales, the debt can be settled quickly while still providing growth with additional revenue from future sales. Of course, this does not mean debt should be used to gamble wildly on something that might not pay off. This could often leave the business in a far worse situation than what it previously was. However, if managed correctly and within terms that suit the business, there is no reason why the money cannot be used to provided added advantages to the business.

Additionally, managed debt can be budgeted for as there is a fixed amount to repay every month.

The adage of spending money to make money is great but you need access to those funds. Managed debt in the context of future revenues does provide a high return on the ‘investment’. It also enables importers to grow their product inventory and keep up with customer demand over the course of several months.

What’s more, managed debt can also be used for the maintenance and repair of equipment while the business capital can be used on identifying new technologies that are more effective and reflective of trends specific to your industry.

If the importer does decide on going the managed debt route, it is also good to know that there are high value import specialists such as ourselves that can finance the cost of goods as well as the associated forwarding and clearing costs.

This means the business owner can focus on using cash to fund new staff or offices, or even identify other opportunities for growth which – in a cash strapped market – is invaluable.