Is debt good for your business?

Lack of capital is the most critical  challenge facing many entrepreneurs of fast growing SMEs. Often the profits generated by the firms are insufficient to fund the extra working capital required for growth, thereby leaving the entrepreneurs with the option of exploring other sources of funds i.e. debt
Is debt good for your business? The answer to this question lies with you. Debts can provide great opportunities for growth if well managed, but at the same time, debts can mean failure for most businesses if not properly handled. Why? Most businesses lack a clear business plan coupled with poor management skills and high level of debts; they find themselves entangled in a web of debts that eventually take them down.
Understanding how to manage your debts effectively might mean the difference between survival and failure. For a growing business, having  a manageable level of debts can be effective way of doing business. As a successful entrepreneur; one can leverage on debt i.e. this is where a firm invests in business operations without increasing its owners' equity. This enables a firm to carry out larger projects than it could actually undertake with its limited capital. Also debts can increase income  streams of properly planned and executed business plans.
An entrepreneur can undertake debts for the following reasons:-
To  increase working capital
To expand into a new market
To make capital purchase
To improve cashflow

Before borrowing it is always expedient to inquire how much debt is too much debt. Through careful analysis of your your cashflow and specific business needs, you will find the answer. The easiest way to find out whether or not your firm has enough resources to pay its debts is by use of current ratio.
Current ratio= current assests/current liabilities.
Generally current ratio lies between 1.5 and 3 for a healthy business depending on the industry.when it is below 1, it implies either; the firm has problems meeting its short term obligations or its ability to turn inventory into cash is wanting. This enables the entrepreneur to audit his credit policy in order to mitigate the business against running into  liquidity crisis.

Helpful tips while borrowing
1. Plan effectively
Before taking any kind of debt, plan effectively. The plan should allow you to forecast your cash requirment; what you need and when you need it. This gives you time to explore various borrowing services and chance to negotiate the one with favorable terms.

2. Examine your needs
Examine your needs in terms of short-term or long-term needs. For short-term needs take short-term loans to avoid paying higher interest expense and restrictive conditions for long-term borrowings.

3. Avoid impulse borrowing
Many entrepreneurs are tempted to take out loans when interest rates are low and money is cheap. Base your borrowing decision solely on your current needs.

4. Have a budget
This is an estimate, often itemized, of expected income and expense for a given period in the future. This can act as a control tool, where you measure your total expenditure against your planned expenditure.