Is running a debt-free business worth it?

The list of corporations built using a low debt load strategy reads like a business hall of fame. 

Berkshire Hathaway, Monster Beverage, Chick-Fil-A, Adobe, Alphabet, and Meta all used little to no leverage to become business empires that are now household names. 

But is a debt-free approach the best strategy for your business? 

Today’s post will weigh the pros and cons of that question so you can make the best decision about this touchy subject. 

Let’s go! 

Pros of Running a Debt-Free Business

There’s no doubt, a low debt load can have positive implications. 

First, it can increase cash flow for reinvesting in the business. It also steels a business against economic downturns and market fluctuations. 

And having the flexibility to manage cash flow can lead to great new opportunities that don’t require lender approval. 

But being debt-free poses challenges, too. 

The Downside of Debt-Free

Many entrepreneurs will argue the U.S. free enterprise system is built on a foundation of borrowed capital. 

Whether that’s true or not, there’s no doubt borrowing money can help speed up the growth process and help businesses avoid missing opportunities for growth. 

This is especially true if your business is capital-intensive and requires significant upfront investment just to get started. 

And just because a business is debt-free doesn’t mean there aren’t any cash flow problems.  Balancing marketing, inventory, payroll, and technology on a limited income can stretch a debt-free business to the hilt. 

Leverage can reduce that strain, at least initially. 

There is also the potential for missed tax benefits since interest payments on business debt can be tax deductible. 

All that being said, sometimes the pros outweigh the cons. If they do, there are a few debt-free business models to examine. 

Creating a Debt-Free business

One of the oldest methods of obtaining a business is to simply bootstrap it. You can set a solid foundation for a debt-free business by relying on your funds and early revenue.

 Make no mistake, this is rarely an easy process. 

You’ll have to make plenty of wise decisions about purchases and run a very lean organization.  Books like The Toilet Paper Entrepreneur and The Lean Startup can provide insight into this process. 

Once you’ve laid the foundation, you’ll have to keep building on it. You’ll be tired from bootstrapping, but don’t give in to the temptation of running to the bank to leverage growth. 

Instead, keep building a strong cash reserve for future expansion and prioritize high-margin products or services. 

If you do seek outside funding, consider alternatives like grants or crowdfunding. 

Most importantly, build a loyal customer base. Nothing ensures stable revenue like repeat customers. If your business model allows it, try to get long-term customer contracts for subscriptions for more predictable income. 

That last piece is critical. 

If you look at the examples in the opening paragraph, every one of them found a way to keep customers coming back for more. 

Berkshire Hathaway’s core strategy of long-term investing resonated with a client base that enjoyed the idea of buy-and-hold strategies. 

Monster leveraged marketing to hone in on a specific type of buyer, and that marketing hasn’t wavered an inch since the company’s inception. 

Chik-Fil-A appealed to a customer base weary of drab fast food, poor service, and confusing menus. 

The list goes on, but the point is that a loyal customer base is critical to staying debt-free. 

The Bottom Line

As long as there is business, the argument about taking on debt to run a company will remain.

Ultimately, you’ll have to decide which side you fall on. 

But with insight from other entrepreneurs and a tax expert, you can make a decision that fits your personality and business style.