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Business Loan

When and Why to Take on Business Debt

Taking out debt for your business may be what it needs to grow.

Taking on debt can be an inevitable step for many businesses. A loan or a line of credit can provide a struggling business with the cash it needs to expand or fund a new venture.

As with every financial move, though, it’s best to consider all angles before going ahead with the decision. Here’s what you need to know about when and why it can make sense to take on business debt:

When is it a good idea to take on business debt?

Businesses can benefit from taking out loans or opening new lines of credit under these circumstances:

When seeking resources to help grow the business. It takes money to make money, and a small business loan can help business owners pay for an expansion when they don’t have the current resources to fund it on their own. The funds can be used to broaden the company’s line of products or services, pay for a move to a larger location, fund a marketing campaign or hire additional staff.

Before taking on debt for this purpose, it’s important for a business to first measure the anticipated return on investment (ROI) for the debt. The ROI for taking on new debt needs to exceed its post-tax interest costs for the debt to be profitable for the business. For example, if a business takes out a loan to pay for new equipment costing $10,000 that will enable it to sign a $20,000 contract, it needs to ensure that a loan won’t cost them more than $10,000 in interest and other fees. Otherwise, the business will not stand to gain from taking on new debt. The profit margin also needs to be generous enough for the venture to be worth the time and effort for the business. If the final gain is minimal, the business owner may be better off investing energy in another lower-cost endeavor.

When trying to build credit. Taking out a small loan or opening a new line of credit can be a great way to build a credit profile for a business and to strengthen its relationship with financial institutions. Small loans and lines of credit can help a business prove it is responsible and trustworthy for repaying debts. This will open the doors to larger loans that may be needed in the future.

When taking on debt for this reason, it’s important for a business to run the numbers and to be sure it can handle the monthly payments, even before the anticipated boost in revenue. If a company cannot meet its monthly payments, taking on new debt can wind up doing more harm than good to its credit.

Why is debt often a preferred source of funds?

Businesses in need of extra cash can choose from several options. Primarily, a business can decide to sell equity in its company or to take out a small business loan or open a new line of credit. Here’s why debt can be a preferred source of funds for businesses:

It has lower financing costs. Unlike equity, debt is limited. Once the loan is paid back, the business owner can forget it ever existed. On the flip side, selling equity in a company generally means forking over a part of the profit for as long as the business exists. (It’s important to note, though, that debt has fixed repayment costs as opposed to equity stakes, which are determined as a percentage of the company’s profit. This means a business owner will need to pay back debt regardless of the company’s success.)

It provides tax advantages. Business debt can decrease a company’s tax liability by lowering its equity base. As an added bonus, interest on business loans and lines of credit are usually tax-deductible.

It mitigates risk. Taking on debt to access funds, instead of selling equity, lowers the company’s risk in the event that the business does not succeed.

If you’re ready to take out a business loan or to open a new line of credit for your business, we can help! Our business loans and the lines of credit feature favorable rates and easy terms. Learn more about the business loan options offered at Listerhill here.

Learn more about managing your business and its finances:

The Ultimate Guide to Applying for a Business Loan

The Products You Need For Managing and Tracking Business

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  • The Great Giveback Official Rules

    1. Eligibility: No purchase or obligation necessary to participate and win. All participants must be 19 years of age or older at time of contest participation. Employees of Listerhill Credit Union are not eligible to register for the contest.

    2. How To Enter the Contest: All Listerhill members who have consumer loans in good standing, (subject to limitations below) are automatically entered. Anyone who takes out a new loan with Listerhill Credit Union, or refinances a loan from another lender with Listerhill Credit Union (subject to limitations below) will automatically be entered to win. Limit of one entry per loan.

    NO PURCHASE NECESSARY: To enter the contest without a loan, send a self-addressed, stamped envelope to: Listerhill Credit Union, P.O. Box 566, Sheffield, AL 35660, Attn: Great Giveback Contest Entry. Limit one entry per person. Written entries must be received no later than July 3, 2021.

    Listerhill Credit Union will not be responsible for incomplete, lost, late, misdirected or illegible entries or for failure to receive entries. All entries become property of Listerhill Credit Union and none will be returned. Any questions regarding the number of entries submitted shall be determined by Listerhill Credit Union in its sole discretion, and Listerhill Credit Union reserves the right to disqualify any entries by persons determined to be tampering with, violating, or abusing any aspect of the contest.

    3. Contest Entry Requirements: In the event the Credit Union, in its sole discretion, determines that any Entry contains content that does not comply with these Official Rules or does not otherwise comply with regulatory guidelines, Credit Union reserves the right to disqualify the entry.

    4. Determining the Winner: A Credit Union employee will select at random four (4) $500 winners (one per day July 12-15) and one Grand Prize Winner from all entries received on July 16, 2021. You do not have to be present to win.

    5. Prizes: $500 Cash Prize: the Credit Union will award four (4) members with $500 cash each. Grand Prize: The Credit Union will pay up to $25,000 toward your loan with Listerhill Credit Union, or combination of loans. No loan payments will be made to loans with any other lender. No cash equivalent provided, and the total prize amount may be less depending on the outstanding amount of loan balance(s) with Listerhill Credit Union. In no event will the prize awarded exceed the total amount of the winner’s outstanding balance of qualifying loans with Listerhill Credit Union. Federal, state and local taxes are the sole responsibility of the winner. IRS regulations require the Credit Union file a 1099 on behalf of the winner.

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    6. To be eligible to win, all loans must be in good standing (not more than 30 days past due at the time of drawing. Eligible loans are limited to auto loans (no indirect dealer loans), personal loans (no loans secured by real property, such as mortgages, 2nd mortgages, and Home Equity Lines of Credit) and recreation loans made to consumer borrowers (not business or commercial loans).

    6. Participation. By participating, entrants agree to be bound by these Official Rules and the decisions of the Contest. Except where prohibited, acceptance of any prize constitutes winner's consent to the publication of his or her name, biographical information and likeness in any media for any commercial or promotional purpose, without limitation the Internet, or further compensation. Prizes not won and claimed by eligible winners in accordance with these Official Rules will not be awarded and will remain the property of the Credit Union.