While it is not by any means essential, living with a certain amount of debt is considered to be more or less normal these days. It’s expected that you’ll have some credit card balance and maybe an outstanding loan or two. Whether for personal or business reasons, debt is not as much of a dirty word as it used to be.
With that said, any time you hear of a business failing, the reason for its collapse will almost certainly be debt. There is a balance to be achieved in business when it comes to borrowing. While some debt is expected, you always need to be aware of when you’re moving from simple, manageable debt into a risky area, where the waves of unmanaged debt can consume your business whole. Finding that balance is a matter of awareness.
How much debt do you need to carry?
The primary impact of a debt burden is that it cuts into the money you earn. You have repayments each month and, the higher they are, the less encouraging your debt to income ratio is going to look. Lenders are going to look with concern on any potential borrower whose liabilities are more than a third of their income. This is where it can be useful to know more about the Debt to Success System – DTSS Words of Art & Legalese can help you understand which of your owings can be written off and how your burden can be remolded in your favor. Your debt repayments should never prevent you from making necessary investments.
What is a good reason to take on debt?
Anyone with an awareness of financial matters will know that there is good debt and bad debt. While this distinction is often governed by such issues as interest rates and repayment terms, bad debt can also simply be a debt you didn’t need to take on. If you are going to borrow, make sure you are doing it for reasons that add value to the business. Borrowing at a higher rate to pay off existing debt is just swapping one burden for a worse one. Ask existing creditors to restructure your debts rather than making matters worse.
What if the tide rises too high?
It has become more or less impossible to run a business without some measure of debt, as the principle of speculating to accumulate has become the received wisdom. While debt allows you to make moves that most businesses cannot make without borrowing, it also means you have to make a return on your investment. If that return starts to fall short of where it needs to be, you’ll face a situation where your debt could sink you. At this stage, you will need to negotiate with creditors and see how your repayments can be rethought. In the end, it is better for them to receive a smaller amount for longer, than nothing at all in perpetuity should you become insolvent.
Being smart about debt is essential. You might need to do some borrowing, and that’s true of nearly all businesses. However, always make sure that you’re borrowing with your eyes fully open, so you don’t take unnecessary risks.