As an entrepreneur, you may have probably heard about “good debts” and “bad debts.” In fact, the concept of good debt and bad debt is not really so if people think that it is good to maintain debts. If you really know the concept of debt, ‘good debt’ doesn’t exist.
Then, why it is called a good debt is that it is only comparatively so if the debt is made for some productive purposes in business or personal life.
So, we can see that the actual problem is people’s misunderstanding or misconception about the definition of debt. Once if it is clarified, it may free you up also allow to perform and produce at a better level as an entrepreneur.
False definitions of debt holding us back
Many out there borrow money to make big purchases like a car, home, or business resources. However, there are a lot of others who think that you are doing evil by borrowing money.
A monkey on your back is always telling that an evil debt will eat out your peace of mind. They say “you may never feel safe with debt in hand and cannot be free to enjoy our life if in debt.” They think that the associated stress and guilt will harm one’s productivity too.
The false definition for debts is pumping in from all directions, and it is quite natural that one gets confused while thinking of debt.
Some finance gurus you see on TV or at an office meet-up may tell you to avoid borrowing money at any cost. A few are saying that you have to build your house with cash in hand up front, alas! It is something even the Facebook director Mark Zuckerberg may not do.
Even though the finance gurus are somewhat correct about the adversities a debt cause in your business, they are wrong at many aspects as like saying that borrowing money for your new house may put you into bad debt.
The mortgage may be a liability, but at its cost, you have taken possession of a new asset which cannot be ignored. If your house is worth the value of the mortgage, which is actually the case, then you hold something known as “equity,” which is just opposite to debt.
What is debt?
So, what exactly is the right definition for of debt?
In fact, debt isn’t all about owing money; it actually owes more than what you actually own. We are in debt, in its true sense, only when your liabilities are greater than assets.
One shouldn’t avoid real debt (as to having more liabilities compared to assets), but it is okay to have incurring liabilities (as to owing assets to someone else), which may be beneficial to ensure productivity and prosperity.
So, in many situations, the actual way to increase prosperity in business or personal wealth is to keep a fine balance over our liabilities and not to avoid it.
Here’s the catch as to where you want to be concerned and where you may feel reassured about borrowing money.
You should understand that not all debts are created equal. There are some typical cases which needed to be identified as a consumptive liability. Say for example:
- If you have not current in a financial situation to afford 5-star dinner every weekend, but you do it anyway and put it into credit, then you are succumbing to a consumptive liability. You are pushing yourself deeper into bad debts.
- If you own a car which causes you problems, but you haven’t paid off for it yet, then it’s a consumptive liability as it is adversely affecting your productivity.
The thumb rule, as put forth by experts of, is that if liability is not adding to your inflow of cash, then it remains as a consumptive liability, which should be avoided.
ON the other hand, it is ideal to secure productive liabilities as these always will leave you wealthier than you’d been before. Some examples of productive liabilities include educational loans, business loans, any line of credit for business expansion, etc.
Advise to business owners to steer clear of debts
It is found that about 60% to 70% of the small businesses tend to fail in their first ten months itself.
The reasons for such failure are many ranging from incompetent business plans, bad location, marketing flaws, etc. However, one of the biggest killers of any one’s business dreams is poor management of their debts.
In fact, there are no such foolproof guidelines for business owners to stay out of debt, but you can always explore these to mitigate the risks involved and to stay off those 40,000 businesses filing bankruptcy each year.
#1. Consider the funding options
Before running to a bank for a business loan or approaching a private lender, consider whether you are able to repay it properly.
If not sure, then start exploring all alternative funding options and innovative methods like crowdfunding or a startup business incubator. All these funding options may be ideal to avoid multiple loans and suffering larger interest rates.
#2. Educate yourself on financial aspects
If you find that a loan may work the best for your type of business, then do some research before considering a loan which is approved for. Learn all the aspects of the loan, understand the terms and conditions specifically, and check for terms like a pre-closure penalty or hidden processing charges, etc.
#3. Devise a repayment strategy
Once if you avail a loan for business, it is very important to sit back and do proper planning and strategizing for repayment of the loan.
The major portion of the strategy will be to create a proper budget which you should stick to until repayment of the loan is made. You may also analyze how your business may increase revenue and reduce the overhead to reach to a better financial position.
These detailed plans will help you be more confident and also makes the process repayment informed and easier.
It is a fact that uncontrollable debts may kill the profitability of any business and eventually trash it down to the ground. Creating practical and workable strategies on how to stay off debt effectively is the key to protect and grow and any business.
John Bell has been writing articles on Social Media, skilled business consultant and Financial Advisor for the last few years. In this post, he has written about the benefits of Social Media Marketing, Business, Finance as well as the features related to the same. For more details please visit here.