When you hear the word “debt,” you’ll likely have some negative connotations in terms of financial health and stability. Most of us associate debt with lousy management and commercial handling. Although it might have some negative impact on our household and personal financing, in business, it can be considered a good thing, albeit risky.
If you have a business, incurring debt might be inevitable and can certainly help you launch your business forward. If you play your cards right, your company will be booming because of the debt you incurred, despite the big risk involved with gaining debt.
A business that doesn’t have the right combination of proper planning and financial health, can quickly get buried under a lot of problems that root from its debt.
Avoiding equity to investors
As you know, there are multiple ways to fund your business and let it grow to massive proportions. One thing you can do is to support the growth of your business is by using its flow of revenue, either with product selling or by offering services. You can also fund your business by raising cash from investors and borrowing money from a particular bank.
If you depend solely on your business’s growth in your sales revenue, there is a big chance that the ROI or return on investment will be slow. Due to a slow return, you might get caught up in your payments which lead you to borrow more money. When you borrow more money to pay off debts, you repeat the process all over again.
Incurring multiple debts simultaneously is the reason why a lot of small-time business owners have a hard time getting out of debt. To avoid getting caught up with payments, don’t spend your earnings in quick fashion. Always prioritize paying off your debts before spending some part of your income.
Speeding up Growth
Growing your business requires a lot of money. When a business grows, most business owners capitalize on that momentum and invest more. Most people call this one, “Striking the iron while it’s hot.” It’s a very bold move if you do this, but do know that there are risks that come with it.
Some business owners may invest too much on something that’ll have fewer gains. When this happens, their investment fails. When investments fail, you can be sure that another loan is already being processed to pay off those losses.
With this information, you can see how much you will spend on each. If you are having issues, such as having poor credit, regarding this matter, you can access a stable cash flow from lenders through instalment loans.
By using debt carefully, you can speed up the growth of your business by opening up new branches, purchasing new equipment, and hiring competent people. This is important if you have a business that relies on areas of influence or requires a massive scale for it to be more profitable.
Emergencies and Accidents
Unfortunately, not one person in the world isn’t immune to unexpected emergencies or accidents. Most of the time, these accidents can cause a lot of money which can become the reason why most businesses, even most people, incur large amounts of debt and eventually fail.
When something unexpected happens, there’s just no preparing for it. For example, a natural disaster like a tornado or flood hits your business. Operations are at a halt, no money is being made. Sure you have insurance, but is that going to be enough to cover for every employee you have? Are those funds enough to cover every loss done by that disaster?
As cruel as it may sound, there’s just no way out from experiencing accidents. The only way that businesses can get out of it is how they react after experiencing an accident. As a business owner, as a human being, it’s your choice if you want to lie down or get up after getting beaten up.
Downsides of Debt
While all of this might sound good to you, debt can be a huge problem if not addressed properly. Some businesses rely on obligation on a lot of their transaction aspects. Taking all these debts at once can be considered a risky manoeuvre as the situation can turn for the worse, depending on the business’s status quo.
As an example, a business incurs debt to alleviate specific issues like cash flow, growth, and revenue. If these issues are solved using debt and the market starts to turn sour, handling the finances can be tough as you will take a lot of repayment that is more than the profit you are gaining. Not to mention that loans come with interest rates, and if not paid properly, it might just go higher.
Debt has its upsides and downsides. If you play your cards the right way, a debt, while having a bad connotation, might be the reason for your business’ success. Repaying any debt you have is an essential matter as it as a situation that can turn for the worse if not handled the right way.
When you have some problems with capital and financing, you can borrow a reasonable amount from legitimate sources to help your business. However, if you know that it is too high, consider acquiring a moderate amount, as not to pay most of your profit to debt.
Go On, Tell Us What You Think!
Did we miss something? Come on! Tell us what you think about our article on the causes of debt in the comments section.
A startup consultant, a dreamer, a traveller, and a philomath. Aashish has worked with over a 100 startups and successfully helped them ideate, raise money, and succeed. When not working, he can be found hiking, camping, and stargazing.