Taking on debt to grow your business might seem counter intuitive. Yet many successful companies use strategic borrowing to achieve business growth, stability and sustainability. The two main types of business debt are working capital financing and debt that funds the strategic growth of the business.
Working capital financing
If you need funds to grow your business or manage day-to-day expenses, a working capital loan can help. Working capital financing helps fund daily operations like payroll and marketing. It addresses short-term needs and manages cash flow gaps to ensure you can cover expenses when incoming and outgoing payments don't align.
If you run a seasonal business, working capital debt helps cover operational costs during off-peak times, ensuring you’re ready to do business when the busy season arrives.
Working capital financing also provides inventory purchasing power so business owners can stock up on materials or products as necessary before sales revenue comes in.
Strategic growth
The path of growth for your business's path is unique – shaped by vision, timing, and opportunity. However, the fundamentals and patterns of strategic expansion share common ground around the need for financing.
Equipment financing and leasing
If you rely on heavy machinery or expensive equipment to run your business, you know these big purchases can prohibitively impact cash flow. Whether it’s best to lease or finance your equipment depends on the nature of your business, however, acquiring it through debt can be a good strategy. You’ll acquire essential technology without depleting cash reserves, and your Business Advisor can help structure the financing so the equipment generates enough revenue to cover the necessary payments.
Real estate acquisition
Using debt to acquire commercial real estate in Alberta's dynamic market can be a strong business and wealth-building strategy. Instead of paying rent, your monthly loan payments contribute to owning a property which can provide stability, potential tax advantages, and even potential future rental income if your business outgrows the space.
Acquisition and expansion - buy vs. build
Using debt financing for strategic business acquisition can fast-track your company's growth. Purchasing an established competitor or complementary business with an existing customer base and revenue streams can be more efficient than organic growth alone. The acquired business's revenues can help cover debt payments, making expansion a valuable opportunity.
New product development
Using debt for product development helps maintain your business’s competitive advantage while spreading costs over time. Strategic debt financing can fuel your innovation journey, whether you're advancing drilling technology, revolutionizing construction methods, launching breakthrough software solutions, or offering a new type of treat in your bakery. Think of it as a tool for turning your vision into market reality while preserving your working capital.
Market expansion
Expanding into new markets is a natural step in your business evolution, and strategic debt can provide the momentum you need without stretching the finances of your current operations. By financing expansion through debt, business owners maintain the agility to seize opportunities.
Risk assessment
It’s as essential to know when to avoid debt as it is to know when it will serve the interests of your business in fueling growth. Industry-specific considerations, broader economic cycles and trends, and your business’s overall financial health are factors to consider when deciding to utilize debt as a tool.
Choosing the right debt instrument
Financing solutions are structured differently. For example, working capital loans are typically secured by your business assets. They are classified as demand loans, and terms vary depending on your financial situation. A working capital loan is structured differently than a line of credit.
Your unique situation and goals may suit the numerous other financing options available. Smart debt management involves optimal debt-to-equity ratios, interest rate considerations, collateral requirements, and other covenants. That’s why speaking to an advisor is the best way to meet your business’s unique financial needs.
When used strategically, financing can transform short-term challenges into opportunities for stability and growth. Connect with an advisor to discuss how you can use debt strategically in your business.
