How to use debt to your advantage

The debt-to-equity ratio is a good measure of both a company’s financial stability and its ability to raise capital to scale.?The formula to find your debt-to-equity ratio is:?total liabilities/total equity.

You can find your total liabilities and your total equity on the ever-important?balance sheet.

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Generally, you want your shareholders financing the operations more than your creditors. It's often suggested to aim?for a debt-to-equity ratio of 2.0 or less. But, in?an asset-heavy business for example, you’re going to have more debt, with large manufacturing or?consumer products companies?carrying ratios of up to 5.0. So, it’s about finding the right balance of debt-to-equity for your industry and business model.?

?That said, all debt is not bad. While you certainly want to show investors and other stakeholders that you are in a?good cash flow position, if you are reinvesting in order to grow, that is a perfectly acceptable reason to be short-term in the red.

Debt used in a responsible way can be very beneficial to accelerate growth. In fact, in many instances, compared to equity, debt can be cheaper by providing tax savings to a company, e.g., interest rates on business loans which are deductible on your company’s tax returns.

?A few strategic ways to use debt include:

• purchasing another business to help you grow faster.
• funding marketing campaigns to acquire new customers or to build out a customer success program.
• buying equipment that helps you streamline operations.

In these instances, your debt-to-equity ratio may be greater than the ideal 2.0, and that's okay. A higher debt-to-equity ratio indicates high growth in these examples.?

Calculate your?debt-to-equity ratio?using our convenient debt-to-equity ratio calculator.

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