Hypothetical example of the day: A client has a successful consulting business that's been growing slowly but steadily. She's well-respected in the field and has carved out a solid niche.

Her top-line revenue is about $2 million annually, After all is said and done, she's taking home about $350,000 in profit. She's not rich, but she's certainly comfortable.

Still, she's not completely satisfied.

The consultant has a stretch goal of $4 million revenue within three years. She believes that would take her annual profit to about $1 million.

Yet she's held back on expanding her business because she needs to install a management team that would cost about $350,000; she estimates that it would take about a year for that team to pay for itself. The team would handle a lot of day-to-day chores that prevent the consultant from the networking and other tasks that help lead to expansion.

The client manages her business like a household budget -- and prides herself on the "no debt badge of honor" -- but worries that if she forks over the $350,000 for the management team, it will leave her with no salary for a year.

Can she afford to make the management team investment?

If she takes a loan backed by the Small Business Administration (SBA), she certainly can.

Let's say she secures a $350,000 SBA-backed loan with a term length of 10 years and an interest rate of 7 percent. That means she'd be making monthly interest payments of $4,064, or $48,768 per year.

Granted, that latter figure comes off her "take-home pay," but it still leaves her with a "salary" of about $300,000. That's far more than she'll need to avoid the McDonald's Dollar Menu for the year.

And while she'll end up paying $137,656 in interest over the course of the loan, that's literally pocket change if she meets her goal and earns $1 million in profit annually - a tripling of profit. Also remember that if the best-case scenario occurs and she does start clearing $1 million annually, she could pay off the loan more quickly.

As for the worst-case scenario - where the management team bombs and revenue remains unchanged. - the debt service is just $49,000 a year.

We've talked about best-case and worst-case scenarios, so remember that your experience will  likely be somewhere in the middle, which makes the loan still more than worthwhile. And that's how you should evaluate whether the loan is right for you.

A note: Non-SBA lenders may be able to offer you loans that also would work, but SBA loans tend to have the best combination of rates and repayment terms.

In a world where federal, state and local government programs are routinely criticized, the SBA bucks that trend and does a tremendous job helping small business. You can make a strong argument that the SBA is underused and should be expanded.

Before we conclude, let's talk about debt.

Lots of clients are scared of debt, but in a sense, debt makes the world go around. Think about it: Could you afford your house and maybe your car if you couldn't make monthly payments?

It's no different when it comes to your business, especially if you are confident in your prospects going forward.

Yes, there is risk involved, but you can't make money if you don't spend money.

Sure, too much debt can be crippling -- and a lot of companies (not to mention individuals) find themselves hopelessly mired in repayments. But as noted earlier, the client here is proud that she has no debt, so she should be able to easily handle $4,000 monthly payments.

Published on: Mar 7, 2018
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