Is Debt Good for a Business?
Many small business owners probably ask themselves at one point or another, “Should I go into debt for my business?” As a new business owner, one of the first decisions you might make is whether to go into debt for the things you might “need” for your business. Depending on the type of business you want, start-up costs can be minimal or very high. And, deciding how much you spend to start could determine what type of business owner (and leader!) you’re going to be.
So, is debt good for a business?
I think taking on business debt can be good for the right reasons. Taking on debt to purchase something that will directly produce income is probably a smart move. For example, if you are starting out as a massage therapist and you don’t have enough money to purchase a massage table, then using debt to make that purchase would be a good move. Why? Because it would be very difficult for you to generate any income without the massage table. In this case, the debt is used for business investment.
On the other hand, there are expenses that can wait or be purchased in cash. Using our massage therapist example, some items that can wait until you have income include business cards, a website, linen cleaning service, fancy marketing expenses, or booking software. You might say, “but, it’s for the business!” and I would say, don’t get sucked into that trap! If it doesn’t directly generate income for you or is a necessary business expense (like a license), then you do not need to go into debt for it. Remember: many business owners start out being resourceful and slowly buy the things they need. It’s important to prioritize the start-up costs that are necessary for starting your business. I suggest using the question “Is this purchase necessary to directly produce income?” as your guide for initial purchases.
What type of debt should I take on?
If you decide you do have to go into debt and you need a larger amount (i.e. a company truck), then you can look into SBA loans. You could also look into 0% intro APR credit cards if you have good credit and a small, short-term need for debt (i.e. a massage table). Other sources of potential funding for your business include friends, family, or a business or personal loan from a bank. If possible, I would avoid high-interest credit card debt. Remember that the 0% intro APR credit cards usually turn into high-interest credit card debt if you don’t pay them off on time.
You should also try to avoid tax debt. If you’re not setting aside money to pay Uncle Sam, you might be going into debt without realizing it because you’re going to get a tax bill at the end of the year. It is easy to forget to set money aside to pay Uncle Sam, so my recommendation is that you save a percentage of your income into a “tax savings account” that you only use to pay your taxes. Consult with your tax professional to determine what that percentage should be.
What if I already have business debt?
Finally, what should you do if you have already accumulated some business debt? If you are serious about being debt-free with your business, the first thing I recommend is you stop using your credit cards. Then, come up with a debt repayment plan with a specific timeframe as to when your debt will be paid off. Finally, reduce or eliminate unnecessary business expenses, and put those savings toward your debt.
I hope this post answers “Is debt good for a business?” for you. So, what do you think? Is debt good for a business? Let us know your thoughts in the comments section below. If you know a business owner who needs personalized guidance with their business finances, have them click here to schedule a complimentary consultation. Or, if they just need some tips on how to save money, have them download our free eBook: Ten Ways to Save $10K.