In this episode of the I hate numbers podcast, we delve into the crucial topic of business debt. While some might view debt as a risky path, it's not always doom and gloom. We'll explore the ins and outs of business debt, when to consider it, and how to manage it effectively.

Why Borrowing Matters for Your Business

As a business owner, you might need a financial boost to fuel your growth. Business debt can be that friendly neighbour, in the form of banks or financial institutions, helping you achieve your goals. Tax benefits are often cited as a reason to borrow, but it's essential to understand the fine print and the real impact on your finances.

Tax Deductibility: Not As Lucrative As It Seems

While debt interest is tax-deductible, it's not a straightforward 1-to-1 benefit. Understanding the details is crucial. Remember, tax savings on interest costs are not equivalent to the total interest paid. It's essential to weigh the commerciality of borrowing, not just the potential tax benefits.

Debt Repayment: A Fixed Commitment

Regardless of your business's profitability, debt repayment remains a fixed cost. Failing to repay can lead to severe consequences, jeopardizing your business viability and personal financial security if personal guarantees are involved.

The Upside of Debt: Speed and Control

On the positive side, business debt can be easier to arrange than other financing options like share issues or asset sales. You retain full control of your company without diluting your ownership.

The Downside of Over-Borrowing

Too much debt can lead to increased risk and financial pressure. Debt increases your operational gearing, making your business more sensitive to changes in costs and sales. It's crucial to have a robust cash flow plan to ensure you can service your debt under different circumstances.

Striking the Right Balance

Business debt can be a rollercoaster ride, with highs and cautious climbs. While it can fuel your growth and offer tax advantages, it comes with risks and responsibilities. Properly managing your debt and maintaining a sturdy cash flow plan are essential for success.

Conclusion

Business debt can be a useful tool if used wisely and managed effectively. Finding the right balance and understanding the consequences are vital. Share your thoughts and experiences with debt, and remember, we're here to help you navigate the financial waters. Until next time, stay financially aware and make informed decisions for your business. Plan it, Do it, Profit!

In this week's I Hate Numbers Podcast, I'm going to be diving into the topic of debt. Now, you may be thinking to yourself, surely debt is something we should stay well away from. There's too much risk, there lies the road to ruination. Not necessarily so. I'm going to unravel, look behind business debt when you should, when you shouldn't, and it's not all doom and despondency.

You are listening to the I Hate Numbers Podcast with Mahmood Reza, the I Hate Numbers Podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. Welcome to another weekly episode on I Hate Numbers. This is the podcast with a mission, and the mission is quite clear. It's to help you and your business make more money. It's to increase your financial awareness. It's to reduce your stress, anxiety, and tax. And who wouldn't want that for themselves?

And I want that for you. Let's crack on with a podcast. Now, let's take ourselves to the beginning. Visualise, picture this scene: your business is prosperous. It's doing more than holding its own. You are realising your dreams. You're continuing to deliver your why, but you know that you need a little extra boost to help fuel that growth. Please step forward.

Stage left, business debt. Now, the money that you are using, if you think of it in terms of your super friendly, but actual conscious neighbor or friend, but this time it's the bank or the financial institutions that we're looking at now for some debt does have its charms. It's a bit like walking a financial tightrope.

One wrong move and you're gonna find yourself falling the right move, though you are gonna be going to safety, and you're going to be finding yourself heading towards comfort. In this podcast episode and beyond, I'm here to act as your financial safety net. Tax is often quoted by many 10 Xs, as I would call them.

As a good reason to borrow money, never use your own because you get tax breaks on them. Well, that's certainly true. There is a tax deductibility involved with debt, but it's not as quite straightforward and as lucrative as some may think. There's the fine print that comes with that tax and debt tag. Now, if you are thinking, great, I'm going to have debt as a tax deductibility, let me show you

and share with you where that tax deductibility comes in when you borrow money. There are two routes to how that money is paid back. Typically, you pay back some of the original sum you've borrowed, which is in posh terms called the capital or principal sum, and then you pay interest on top of that. The interest element, by the way, folks, is the profit that the lender makes from you.

Alternatively, there may be some loans, some debt that you can arrange to have where you merely pay the interest and then you pay the debt capital back at some future point, very similar to how you may structure your mortgage. It's called a repayment mortgage where you pay back the initial sum with interest, or if it's an interest only in mortgage, you only pay the interest accordingly.

But eventually, That time will come when you have to pay back the sum you've originally borrowed, whether that's in 20, 25 years or some other timeframe you've arranged with your lender. The tax deductibility comes in the interest cost that's allowable as a business expense against your business profits.

If you don't make profits, by the way, folks, the interest cost is still there. Which can be one of its downsides. Now, we've talked about the tax deductibility, and before we leave that, remember this, if you've got a hundred dollars worth of interest and you borrow a sum of money where the interest cost perhaps is $10 that you're paying back then the $10 is what's deducted off your hundred-dollar profit.

That gives you $90 worth of taxable profits and you pay tax on that. So, A $10 interest cost does not equate to a $10 tax savings, certainly not as far as the UK jurisdiction is concerned, and certainly for most countries around the world, unless you've got a hundred percent tax, then it's not gonna be fully deductible.

So think the commerciality of the borrowing, not just the tax that you are saving so that tax deductibility can be a bit of a misnomer and also a bit of a trap for yourself as well. Now, speaking of commitments where interest and repayments are; so irrespective of how much profit you're making in your business, even if you are tracking at a loss, debt is repayable.

Debt has to be serviced irrespective of the circumstances you find yourself in. So if things are tight, that loan repayment, the interest that goes with that still has to be paid back to the lender. One of the things you have to be concerned with as a lender, if they fear that they're not gonna get paid back, then they will pursue some form of action to recover that debt, which mean it could put your business viability

in the air. It could also, in some situations, impact on you as an individual. So we talked about debt in terms of the tax adaptability, we've talked about how it can be a good thing. Let's reinforce the idea of why it can be a positive thing as well. In general terms, debt tends to be easier, not easy, to arrange compared to things like raising money through share issues,

through selling of assets. So the speed and the ease is two of its favoring points. Also, control of your company, control of your business is not diluted. Share ownership indicates, equity that's going indicates that somebody else has got control or involvement, certainly on a voting basis in your business.

Let's talk about some of the downsides of over-borrowing and borrowing too much money, and that can be the case. Now, debt represents a commitment to your business. It represents a fixed cost. It's a cost that has to be paid out irrespective of how much money you are generating. Now, if things are very positive, your sales line is going up, profitability is there, then borrowing debt is a very positive thing to do.

You can more than adequately cover the debt and you tend to make large amounts of profit as a result. However, if things go the other way round, and the sales line, the profitability is declining. then what will happen is you're going to get very close to squeaky bum time. And remember, debt is a commitment.

Debt is something that the lender expects to see coming back into their bank account on a, typically, monthly basis. So even if you've got financial problems, you've got to make sure you can still service that debt. If you don't, the lender is going to take some form of action, which could affect the future operation of your business.

Another downside of debt is what's called gearing, what the Americans call leverage. So if we think about our costs, I've mentioned one word already called fixed. The other partner in that cost relationship is called variable. If fixed costs of which debt is a fixed cost, increases your operational gearing, the risk that you face from how your costs are structured increases

also. And with an increasing risk that has two effects. Number one, if you do need to borrow more money, the lender is going to charge a premium on how much they're going to charge you. The second thing is break-even points increase, profitability gets gobbled up. And again, you could be in a financial conundrum.

Now, I'm not completely anti-debt. My business was financed in the early stages by borrowing money. Many companies that we recognise as established brands like Sky to finance themselves, those big companies here, leveraged and borrowed huge amounts of money, and in the early days, while cashflow was building up, found that debt servicing to be very pressured, but they managed it.

One thing I would definitely recommend folks that you do, whether it's debt or any other form of commitments, is to make sure you've got a financial plan, a cash flow plan underpinning the actions that you are taking. A sturdy cash flow is like having a life jacket on the rocky financial seas, and if you're feeling lost, Fear not, do not despair.

My Numbers Knowhow platform, a hint there, there's a link in the show notes. It's there to guide you like a compass that help you navigate the choppy waters in front of you. If you're thinking to yourself, what do I do? How do I work out the cost of the debt? what's the interest commitments going to be? Well, there's a loan calculator that I'm going to link also in the show notes where you can actually do that number crunching.

Now let's conclude and let's summarise where we are. Now, business debt can be like a rollercoaster ride. It's got its highest, it's got its cautious climbs, and it's also got a few unexpected loop-the-loops. However, it can be the fuel that moves your business along. I certainly would not be averse to borrowing money.

But you need to make sure that you can cover the costs. You need to think about where your sales line and the other costs in your business are likely to be. Debt is relatively inexpensive still compared to other options. There is a greater degree of risk that you have in your business as a result of having more debt.

The accessibility of it is relatively speedy. You don't have to dilute control in your company, but there are risks as there are anything in life, and the more debt that you leverage, the more debt that you have, it could spill over, not only ensure business survivability, but if you've given a personal guarantee, it could also affect your livelihood in a personal capacity as well.

So folks, I hope you found this week's podcast useful. I'd love to hear your thoughts. Are you a borrower? Are you a saver? What's your attitude today? And until next week. I'll see you on the other side. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value.

If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.