Is debt bad for your small business?
As long as I can remember, I was always taught ever since I could remember that having debt was bad. My dad would always tell me how it’s important to stay away from debt, and to always to try and pay cash when I can. Now that was when I was very young, and knowing my dad he probably didn’t think I would understand how to use debt to my advantage. Of course I took his advice like a grain of salt and still went out and got myself my first credit card. Thanks to Wells Fargo, they had student credit cards for college students and my limit was $800. I maxed that puppy out within the first couple of months. I soon realized that half of my paycheck from my part-time job was going towards the minimum monthly payment on that credit card. I later was able to pay off that card, but it wasn’t for a very long time until I was able to pay it off. I learned very quick how debt can get out of control if not used properly. Till this day I have yet to tell my dad about that story, I already know he would giggle about the fact that I had to learn the hard way. As a young adult I slowly learned how debt can be used to my advantage, my former boss, now one of my close friends also taught me about debt. He owned a small business and always made sure I understood the reason for his long success was by staying debt free. What he meant by that was he always kept his business credit cards paid off every month, and if he had any working capital loans he would always try to pay those down as fast as possible. But he also taught me how he couldn’t be successful without debt and credit.
One of the most known ways to leverage debt is with real estate. Most people can’t afford to buy a house with cash, so we take out a loan or mortgage. The lender will require a downpayment and they will finance the balance. The great thing about this is you’re only laying out a fraction in cash, and you get to reap 100% of the appreciation. (Of course, there’s never a guarantee the property will appreciate, but history shows over time all real estate has appreciated.) Imagine if you rented that property out, and the tenant ended up paying the mortgage for you! Because of debt, you were able to acquire an asset and in return have someone else pay the debt down and again possibly gain appreciation as well!
There’s a fine balance between “leveraging” and “abusing” debt. So let’s go over some reasons how debt might help a small business. If you run a small business you might have experienced a time where cash was low or very limited. If you can hold the cash and find a way to expense other charges on the business with either a company credit card or even business cash advance, this will give you the flexibility to do other things with the cash. Some vendors only work with cash, check or wire and they don’t have the ability to accept payments via credit card. So having that cash available will be handy when the time comes. Make sure when using credit cards or loans, you want to make sure you don’t expose yourself too much. Make sure what you expense can be accounted for with future revenue. When spending “borrowed” money, make sure it’s for a good reason. What I mean by that is any use of credit that will increase your debt; you want to make sure it’ll create future income if you can help it. Try not to spend or create debt on things that won’t create income for your business. Marketing, advertising are some area’s that’ll increase the chances of future income.