Taking on Debt Can Be Good

As much as I advocate against being in debt, I have come to understand a such thing as "good debt" - a difficult term in today's economy but still necessary for some. You know, the debt that will help you get what you need to increase your value now and still help you maintain positive cash flow. For example - if you have $100,000 in the bank and need a new home, would you use the entire $100,000 to purchase a home outright (but have nothing left in savings)? OR, would you finance a portion of it at low interest rates, then use the rest of your cash to furnish the home and maintain some savings (remaining cash positive)?

In the same way, you should think about this when considering financing for your business. Why do you need financing and what will it do for your business over the long-term? Many owners use credit cards for financing as start-ups. As the linked article suggests, be very cautious in taking on this method of financing, especially now since credit card companies are preparing for new regulations and doing so by hurting consumers.

When considering debt, understand the life of the product you are getting and make sure the debt instrument matches. For example, say you are getting equipment that will support providing a new service for your business and it should last at least five years, make sure the term of debt you are getting is also five years. Oh yeah, in case you missed it, make sure new debt is in support of new revenue!


Quick Tips

1. Bankers usually consider the 5 C's of Credit when processing a loan application. Make sure you fit this criteria as best you can so that you won't waste your time.
2. Try to pursue debt with a bank you already have a relationship with (e.g. deposit accounts, mortgage, another loan, credit card, etc).
3. As a small business, except in the rarest cases, you will be required to provide a personal guarantee - make sure your personal finances are in order.
4. Consider applying for a loan through the SBA program. The process can take a while, depending on the type of loan you pursue and who you pursue it with, but the guarantee placed on the loan allows for a bit of leniency regarding your background, especially start-ups.
5. If you are refinancing, make sure the payments you will take on are at least 20% less than what you currently pay monthly.

This is a touchy subject for me because I really am anti-debt but I know the material so I have to share. I would rather anyone seeking debt have the information to make a decision versus just hearing "you should or you shouldn't get it". That may have helped me when I got into my debt situations.

Do you have any tips to share about pursuing debt? Any success stories for businesses that acquired debt? Share them in the comments.