- Business debt is not only bad news and does not mean your business is about to go bankrupt. But how?
- If you are able to reduce your company’s ‘bad debt’ one payment at a time, you’ll be able to afford yourself to get into ‘good debt,’ which is debt with potential for actual growth.
- But in order to do it correctly and know which are some of the best examples of those, keep on reading.
It turns out many businesses go into debt during their lifecycle. As a matter of fact, you’re likely to see quite a bit of debt from the time your business begins through its ultimate maturity. Sometimes it’s okay to go into debt, sometimes it isn’t.
What is An Example of a “Good” Debt Scenario
Here’s a great example of a prospectively "good" debt scenario: Let's say your department store turns over $1,000,000 annually in revenue, after expenses. That’s pretty good! And traffic is increasing. In fact, it’s gotten to the point where you need to expand. The expansion will definitely bring in similar numbers, given time. Your community is growing as well. All projections indicate it’s a positive move.
Here’s the problem: The new department store isn’t going to be cheap. As a matter of fact, all projections indicate a $1.75 million dollar build, you’ve rounded that up to $2.0 million because you understand building projects always go over budget, and that means a minimum of two years’ revenue paid toward a debt for construction.
This is good debt, because optimally—combined with your main store—your additional store will make enough in its first year of operation to pay back the cost of the build, but you’re going to have interest, and things aren’t going to go as planned.
Still, projecting out for such a situation with a four-year payback time and a build projection higher than the reality will likely be an effective way of gauging the cost, and hopefully coming in under-budget.
Provided business continues as planned, and you’re able to pay back the debt, this would be an example of good debt. Many businesses have situations like this which result from profitability and success.
Ensuring that such efforts don’t end up undermining you requires careful planning and the freedom to take out a business loan.
How to Reduce Business Debt
For smaller businesses, you’ll have similar opportunities that are scaled-down. And, additionally, your personal financial situation as regards good and bad debt will likewise have similar characteristics.
Find out more about how to regain your financial freedom with a new debt-free life,” then read here. You’ll find plenty of strategies to help you consolidate your debt, reduce what you owe, and ultimately experience increased financial autonomy—this in a personal and “business” way.
There are four ways to reduce your business debt:
- Self-directed consolidation
- File for bankruptcy
- Develop a cost-cutting strategy
- Tax breaks
1. Self-directed consolidation
One way to get out of debt is through self-directed consolidation, where you find fast online loans to pay off debts en masse, and then you just pay off the loan you got from the ‘net in a single sum rather than divvying it up between your previous debts.
This reduces the cost of interest over time. One interest rate costs less than multiple rates. Small to medium-sized businesses will likely have to find more diverse solutions, but again, there are solutions out there.
2. File for bankruptcy
You could additionally file for bankruptcy, but this should be a last-resort scenario. Ideally, you want to first cut unnecessary costs and get out of debt before you cash in your chips and scoot your business chair from the table of profitability.
3. Develop a cost-cutting strategy
Some things you can do to cut costs include upgrading to cloud-based services in order that internal tech solutions can be more cost-effectively surrogated, optimizing manufacturing/delivery, and cutting unnecessary employees. Alternatively, you can re-apportion employees to different areas of your business where they’ll be more effective.
4. Tax breaks
Tax breaks are also a great way to save money; look where you can sustain them through charitable donation or sustainable energy conversion. Sometimes a small donation or an upgrade in your energy solutions can save you tens of thousands in taxes for the year, allowing you to more quickly pay off existing debts.
There are many strategies out there. The most important thing is not to become overwhelmed, but to work at getting rid of that debt one payment at a time. Tomorrow is another day, and when you’re “in the green,” you’ll have the ability to sustain good debt which leads to expansion.
To boil it down: good debt can yield profitability with time, bad debt will not. So, avoid the bad debt by getting into a situation where you can afford the good debt.
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