Chances are, if your
business is at all successful, you are going to confront that question. At some point, you’ll need to fund your business growth: a larger space, more computers, more sophisticated software, and more equipment. You’ll have to buy raw materials, build your inventory and hire additional people. You’ll need to invest in continual training and developing your people.
All of this requires an upfront investment of money, invested with the hope of it bringing a return and growing your business’s size, profitability and impact. And, of course, that investment is made with the risk that it may never work out the way you’re planning.
So, you’ve prayed about it. You’ve run the numbers, considered all the alternatives, and you’ve come up to a set of conclusions:
- You should grow your business.
- This is the time and opportunity to take the next step.
- It requires
more money than you have.
Now, you are faced with the decision. How do you fund it? Where does the money come from?
There is an answer out there in the compendium of
worldly wisdom. Depending on the size of your business, the conventional wisdom says that you go to the bank and borrow the money.
Does that knee-jerk reaction, and off-the-cuff advice hold true for a Christian business?
Nuances
In our 21st Century business world, we should recognize some nuances when it comes to business debt… Not all debt is the same and some debt is less onerous than others. For our purposes, debt can be characterized and classified in several important ways. When considering taking on debt, we should keep these issues in
mind.
The relative amount.
It’s one thing to owe $1,000 and it’s another to owe $1 million. If you are a sole proprietor, the $1 million debt might be staggering. However, if you’re a Fortune 500 company, it may not be even
noticeable.
For a business, the real issue is the amount of debt payment relative to the cash flow. The greater the ratio of cash flow to payment, the more acceptable the debt is. For example, if you are bringing in $100,000 per month, $1,000 a month debt is 1/100th of your cash flow. That same $1,000 is 20% of
your cash flow if you are averaging $5,000 a month. Clearly, the smaller the percentage of your cash flow the debt requires, the less dangerous that debt is.
Another way to look at the relative amount of debt is the asset to debt ratio. This looks at your business assets and then compares the total amount of debt
to the total assets in the business. If, for example, your total debt exceeds your assets, you are in jeopardy of going bankrupt. So, the lower the debt to asset ratio, the more tolerable is the loan.
The purpose of the debt.
Again,
it’s one thing to borrow money to acquire a new piece of production equipment, and it’s another to do it so that you can re-decorate the corner office. A long-term lease on a production facility is one form of debt, a credit card bill for entertainment expenses quite another.