Not all debt is bad debt – find out why
It’s really got a bad name. Most religions are against it, the Bible warns against it – “Let no debt remain outstanding except the continuing debt to love on another” (Romans 13:8) – and even Shakespeare is down on debt in Hamlet when Polonius tells his son Laertes: “Neither a borrower nor a lender be”.
During the 18th and 19th centuries in England and Wales over 10,000 people were imprisoned for debt each year. This wasn’t in place of debt as an inmate usually had to repay a creditor in full to secure release or work off their debt through harsh physical labour such as breaking rocks.
The sentence went towards their outstanding debt and the cost of their incarceration so would mean they’d sometimes be in prison for many additional months and years.
The Debtors Act of 1869 limited the ability of courts to sentence debtors to prison time but didn’t prohibit it. Debtors who defaulted or didn’t settle satisfactorily within time could still receive six weeks inside.
The most famous debtors prison in London was the Clink jail on Clink Street that had the debtors entrance round the corner on Stoney Street. Two terms still in use such as “in the Clink” and “Stoney Broke” originate from this location and fate!
Debtors prisons might have disappeared but the sentence still remains, although only in England in the UK. Non payment of Council Tax can lead to a modern debtors prison sentence.
Today there are seemingly daily debt scare stories as consumer and personal debt levels in the UK are rising to new heights mainly from secured and unsecured debt such as overdrafts, personal and payday loans, store cards and credit cards.
So why can debts for business possibly be a positive?
Firstly debts can be offset against tax. The cost of incurring debt can be cheaper than paying tax on profits depending on the company’s circumstances so it can be a logical way of maximising benefits.
Debt can also be a more cost effective form of financing than equity.
Equity means giving away part of the company’s capital, so you lose the benefit of that proportion of business value increase. Whereas taking on debt to grow a business still leaves all of the increased value of the business as yours.
Equity also carries risks. If a company were to go bankrupt then those shareholders who had invested would have the lowest likelihood of recuperating any of it. Investors want to see increased revenue, profits and cash flow with higher rates of return, sometimes 10% or higher – debt is usually cheaper to service.
These facts make debt a virtual bargain for the savvy business owner who can look past the headlines.
Like fire, debt is useful if used appropriately, contained and carefully monitored. Left to build up unconstrained, it can be disastrous for your business.
If your company debt is approaching critical levels then take a moment to contact us.
A free initial consultation with one of our expert advisors will help you focus on your immediate priorities and set out a clear road map for the direction you want your business to travel in.