Here are some good reasons to go into debt on your new venture rather than pulling in investors and giving up ownership and some control. If you have a complex service then attracting investors and or partners which will also add a specific expertise to your operation can make sense but if you’re only after their money then borrowing or taking on debt is usually your first best choice.
Reasons to borrow include:
- Paying interest on debt reduces tax burden. Many start-up owners are not aware of this benefit of borrowing. Interest expense reduces your taxable profit and, therefore, reduces your total tax expense. Equipment or project financing provides you the benefit of a Section 179 tax deduction.
- Debt can be less expensive than your opportunity cost as long as you have a detailed business plan. Of course every new venture has risk but a well thought out plan, marketing strategy and service or product analysis will provide a better chance for success. In the initial phases, no matter what the cost of capital is; if you can make a profit and build on that momentum then the debt is worth it. As your business grows and time passes, the cost of capital will greatly decrease allowing you to expand even faster. A good payment track record will build your business credit profile quickly.
- Debt is usually always less expensive than giving up partial ownership and inevitably some control. Investor equity is typically more expensive in the long-term than taking on debt; particularly if your financial need is short term, cyclical or related to working capital. Equity costs you a part of your business and its profits, forever. Many problems we see are eventually between investor and management due to differences on how the business should operate.
- Debt encourages discipline and thoughtful spending. This is common knowledge among investment firms, but is something that small businesses generally overlook. Debt normally brings a discipline about spending and investing that can help your company, especially in its initial growing years. We often see investor funded firms spending wildly and without careful attention to costs because that large lump sum of money has landed in their bank account and investors expect activity so they jump into action at a reckless pace which can quickly lead to problems.
Borrow from friends and family, from your own savings and home equity when possible and take on finance debt to cover the balance. Layout a budget and plan that takes small, careful steps to get your business going and do not consider investor debt unless you are taking on a working partner that adds a particular needed expertise to your business. Financing your own venture will help you sleep better and have greater control of your own destiny.