In today’s competitive business landscape, understanding the role of debt is crucial.
According to ASIC, poor cash flow stands as the top reason behind business failures.
One significant contributor to this cash crunch is high debt service. Director guarantees, often tied to loans, create immense pressure on business owners to meet payments. Defaulting might even jeopardise personal assets like homes, vehicles, and marriages.
But is total debt avoidance the solution? Not necessarily.
Debt isn’t inherently bad.
In fact, historical records from the Ancient Sumer Empire (circa 3,500 BC) indicate the use of loans for business activities. The ancient world recognised that debt could generate profits.
Good Debt vs. Bad Debt
Just like any tool, debt’s value lies in its application. Think of it as machinery; it must generate desired outcomes. If it doesn’t, it’s time for a replacement.
Debt, like a tool, should yield positive results, enhancing your business’s lifeblood”profit. Good debt, when used smartly, amplifies your business. For instance, financing a truck yields returns through income generation despite interest and fees. Similarly, investing in property or undervalued stocks can be profitable ventures.
It boils down to making money work for you, ensuring profits surpass borrowing costs.
On the flip side, bad debt lacks a profitable purpose. Frivolous credit card spending or high-interest loans to salvage failing businesses are prime examples. Ineffective debt can push a once-thriving business to the brink.
Navigating Debt Strategically
Understanding debt as a tool simplifies its use. Start by aligning your purpose with suitable financial products. Traditional banks offer competitive rates but are conservative in lending. Fintech or business lenders might charge more due to risk.
Matching cost and risk is vital. Use low-rate, long-term loans for projects with delayed returns. High-rate loans, while pricier, work for urgent, lucrative projects. Avoid the error of using high-rate loans for long-term investments.
Choose the right tool for the job. Consider how borrowed funds can sow profitable returns.
Tackling Existing Debt
Stuck in considerable debt? It’s not the end. Borrowing more isn’t the solution. Seek professional guidance”start with your accountant.
Specialised debt experts are invaluable in these situations. They tailor solutions to your needs, from consumer to multi-million-dollar commercial debt. Negotiators can remarkably reduce debts while maintaining credit integrity.
This strategy provides a second chance for your business.
Next, collaborate with business coaches or specialists to reshape your business direction.
In essence, debt’s ease of acquisition contrasts with its difficulty to eliminate. Striking the right balance fuels business growth. Vigilance in borrowing ensures borrowed funds work harder than creditors. Remember, informed debt management propels your business skyward.
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