Working with companies seeking funding of some sort is our bread and butter, so we regularly deal with entrepreneurs who already are managing some debt.

But sometimes we run across CEOs who have no debt, although they have had it in the past. Invariably, they report being happy, saying they have no worries and that managing their businesses are much easier without the threat of repayment hanging over their heads.

That's all well and good - and it's certainly better to be running a company with no debt than one that's drowning in it - but debt isn't invariably bad.

In fact, executives at companies with no debt should be asking themselves three questions.

First, is there a line of credit in place?

Maybe you don't need credit at the moment, but having one prepares you for the risks you'll inevitably face.

Fires that destroy your inventory don't announce themselves in advance. Competitors don't discuss new products that will make yours obsolete. Important, expensive equipment often gives no signs it's going to break.

Having a credit line enables you to deal with all those potential problems

Also remember that it's best to secure a line of credit when you don't need it. The fact that you have no debt should ensure a good rate.

And remember that a credit line carries minimal risk because interest is only charged on the portion you use. There's no charge if you don't use the line.

Second, is your lack of debt hurting your growth prospects? Yes, you might be making a solid amount of money, but wouldn't you like to make more? There's an old saying that if you aren't trying to move ahead, you're likely to be run over by someone else.

Say a chief competitor of yours goes belly up. Sure, you'll probably obtain some of their business by default, but by being aggressive you can stand to capture a much larger chunk.

Obtaining a loan might enable you to hire some of their best employees, buy their inventory or other resources, or simply expand to markets you hadn't tapped before.

In a different scenario, say you're presented with the opportunity to buy raw materials at a one‐time incredibly low price. By using debt wisely, you can buy those materials and make it back - and then some - when your manufacturing costs plummet.

Third, if you had more debt, could you be making more money?

While similar to the second question, there are some differences. Remember that investing in your company isn't a bad thing.

Research and development costs money. So does expanding the sales force or the distribution network. Advertising, marketing and public relations campaigns don't come for free.

In other words, it costs money to make money.

And we haven't even begun to discuss leverage, which is the use of debt for investment purposes, while also preventing a company from spending too much of its equity.

In summary, having no debt is a good thing - no doubt about it. But the well‐planned, strategic use of debt can be far better, leading to much faster growth, higher profit margins and a stronger bottom line.

Published on: Sep 28, 2016
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