For most startups, securing capital is a major factor that leads to growth. According to a World Bank report from 2023, 80% of new businesses fail within the first five years, and cash flow is one of the leading causes. However, when used correctly, business debt can be the funding needed to scale operations without sacrificing ownership. For most self-employed, taking a Business Loan would be an ideal way to secure the finances required to expand.
Why Consider Business Debt?
Business debt enables access to capital without much hassle, thus facilitating growth without equity dilution. Suppose you need ₹5,00,000 for expansion; getting a loan at 12% interest will provide liquidity to invest in key areas. Now, let’s consider an example of how business debt works:
| Loan Amount | Interest Rate | Loan Term | EMI (Monthly) | Total Interest Paid | Total Repayment |
| ₹5,00,000 | 12% | 1 year | ₹48,000 | ₹44,000 | ₹5,44,000 |
This loan can be used in hiring, purchasing the inventory, or marketing, directly impacting business growth.
Strategic ways of using debt for growth
Acquiring Key Talent
Skilled people are important investments for fast growth. A loan can be taken to hire skilled professionals. For instance, borrowing ₹2,00,000 for key hires may increase sales and revenues.
If hiring results in a 20% increase in revenue, the ROI can be substantial. A ₹2,00,000 investment in talent could translate to an additional ₹40,000 in monthly revenue.
Buying inventory
Product-based businesses will borrow money to increase inventory. So, if you have borrowed ₹3,00,000 to expand your inventory, you would have an inventory turnover of 3. That means the same ₹3,00,000 can be converted to sales worth ₹9,00,000.
Assuming a profit margin of 20%, this might generate ₹1,80,000 in profits, clearly a good return on borrowings.
| Loan Amount | Sales Generated | Profit Margin | Expected Profit |
| ₹3,00,000 | ₹9,00,000 | 20% | ₹1,80,000 |
How Much Debt Should You Take?
Managing debt responsibly is key to a startup’s financial health. A good rule of thumb is to maintain a Debt-to-Equity Ratio (DER) of below 2:1. For every ₹1 of equity, a startup can borrow up to ₹2 in debt without taking on too much financial risk.
For example, if your equity is ₹3,00,000, you can safely borrow ₹6,00,000, keeping your DER healthy.
| Equity Amount (₹) | Debt Amount (₹) | Debt-to-Equity Ratio |
| ₹3,00,000 | ₹6,00,000 | 2:1 |
A debt-to-equity ratio higher than 2:1 can signal high risk, which lenders or investors may view unfavourably.
Conclusion
When used correctly, business debt is an effective tool for fuelling startup growth. It can provide the capital needed for key investments such as hiring talent or increasing inventory. However, it’s important to borrow responsibly, maintain a healthy debt-to-equity ratio, and ensure that debt is used for high-return activities. Your startup can scale faster and achieve long-term success by managing debt effectively.
Frequently Asked Questions
Q. How can business debt help my startup?
Business debt offers access to capital for important investments like hiring talent and increasing inventory without sacrificing equity.
Q. What is the ideal debt-to-equity ratio for a startup?
The ideal ratio should be less than 2:1, meaning the firm can borrow up to ₹2 for every ₹1 equity.
Q. Can I use a business loan to purchase inventory?
Indeed, borrowing for inventory expansion would increase sales, hence profits, as indicated in the example above.