Author: Daniel Tan
Written at: 18 Sep, 2024
Debt often carries a negative connotation. Stories of crippling student loans, overwhelming credit card balances, and companies folding under financial strain dominate headlines.
However, it's essential to recognize that all tools can be used the right way or the wrong way.
When managed wisely, debt can serve as a powerful tool to achieve goals, fuel growth, and even build wealth. Here are some scenarios where taking on debt can be a strategic move.
Investing in Education
Borrowing to finance education is a common practice worldwide. When students take out loans to attend universities or vocational schools, they're investing in their future earning potential. A well-chosen educational path can lead to higher-paying jobs, making the initial debt a worthwhile endeavor. According to a 2019 report by the OECD, individuals with tertiary education tend to earn significantly more than those without.
Business Expansion
For businesses, especially startups and SMEs, debt can be a catalyst for growth. Loans can finance new projects, purchase equipment, or expand operations. When these investments yield returns that exceed the cost of borrowing, the debt becomes a profitable venture. Studies also highlighted that SMEs leveraging loans for expansion saw notable revenue growth compared to those that didn't.
Debt as a Cash Flow Management Tool
Debt can help with managing cash flow, especially for businesses. Companies often face mismatches between their cash inflows and outflows, and short-term debt can bridge these gaps. This ensures that they have the liquidity needed to operate smoothly without having to sell off assets, miss out on growth opportunities or delay paying their employees/suppliers affecting their confidence in the business.
Building Creditworthiness
Taking on and responsibly managing debt can help individuals and businesses build a positive credit history. This track record can be invaluable when seeking larger loans or favourable interest rates in the future. Simple actions, like using credit cards judiciously and ensuring timely repayments, can bolster one's credit profile.
Lenders look at the following 5'c when assessing a borrower.
- Character
- Capacity
- Capital
- Collateral
- Conditions
Having no credit history may play a role in affecting their assessment.
Taking Advantage of Opportunities
Sometimes, opportunities arise that require immediate capital. Whether it's a limited-time investment opportunity, purchasing undervalued assets, or capitalizing on market conditions, having access to debt can be advantageous. The key is ensuring that the potential returns justify the borrowing costs and not over-leveraging with proper budgeting.
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