Owning your own small business is the American dream. And for a good reason: self-employment offers more freedom and control than any other job and the potential for high rewards.
But starting a small business also comes with its own set of challenges, not the least of which is finding the right financing. After all, most small businesses need some form of capital investment to get off the ground.
And in fact, not all business debt is “bad” debt. For example, some debt enables the business to expand to new locations, hire more staff, and invest in better training and equipment. AdvancePoint is an example of a marketplace helping business owners secure this financing.
The question is, how much debt should you take on to develop your small business? The answer, of course, is not so simple. It depends on several factors, including the amount of cash you have on hand, the nature of your business, and your financial situation. But there are a few general guidelines you can follow when considering how to finance your small business.
Consider your overall financial situation
The first step is to look at your overall financial situation, including your business finances and your personal finances. For example, do you have a lot of debt? Are you able to make your monthly payments? Are you comfortable with the amount of risk you’re taking on?
Answering these questions will help you understand how much debt you can afford to take on. Keep in mind that taking on debt is a risk. But so is starting a small business. You need to weigh the risks and benefits of both before making a decision.
Consider the nature of your business
The next step is to consider the nature of your business. Is it a high-growth business? A low-growth business? A seasonal business? The type of business you have will impact how much debt you can afford to take on.
For example, a high-growth business with good business management is more likely to handle a large debt than a low-growth business. That’s because a high-growth company is more likely to generate the cash flow needed to make the monthly payments. On the other hand, a seasonal business might not be able to handle as much debt because its cash flow is more erratic.
Consider your business goals
Your business goals are also essential to consider when deciding how much debt to take on. Your long-term goals will dictate the amount of debt you can afford to take on in the short term.
For example, if your goal is to expand your business to a new location, you’ll need to take on more debt than if your goal is to improve your current location. That’s because expanding requires a more significant initial investment.
The bottom line is that you need to be realistic about your goals. For example, if you want to achieve something that will require a lot of debt, you need to make sure you have a plan to generate the necessary cash flow to make the monthly payments.
Consider the interest rates
Finally, you need to consider the interest rates. The interest rate you’re offered will impact how much debt you can afford to take on. A high-interest rate will increase your monthly payments, while a low-interest rate will decrease the number of your monthly payments.
The interest rate you’re offered will also impact the amount of risk you’re taking on. A high-interest rate means you’re taking on more risk. A low-interest rate means you’re taking on less risk.
Difference between good debt and bad debt
One of the most important things to understand when considering how much debt to take on is the difference between good debt and bad debt. Understanding this distinction is critical to making the right decision for your business.
Good business debt
Good debt is debt that will help your business grow. The type of debt enables you to invest in your business, expand your operations, and hire more staff. Doing these will help grow your business and generate more revenue than the cost of the loan. Some examples of good business debt include the following:
- real estate
- inventory
- equipment
When you take on good debt, you’re investing in your business, and the loan cost is worth it because you’re making more money.
Bad business debt
Bad debt is debt that doesn’t help your business grow. It’s the type of debt you take on for personal reasons or to finance day-to-day operations. Some examples of bad business debt include the following:
- credit card debt
- car loans
- personal loans
Bad debt is the type of debt you should avoid when developing your small business. That’s because it doesn’t help your business grow and can put you in a difficult financial situation if you cannot make the payments.
Where to find good loans
If you’re looking for suitable loans to finance your small business, there are a few places you can look. The first is traditional lenders such as banks and credit unions. These lenders typically have lower interest rates and longer repayment .
Another option is alternative lenders such as online lenders. These lenders typically have higher interest rates, but they can be a good option if you have bad credit or need the money quickly.
You can also look into government loans, such as the Small Business istration’s 7(a) loan program. These loans typically have lower interest rates and longer repayment .
The bottom line
When starting out, it’s natural to want to grow your business as quickly as possible. However, the bottom line is that you must carefully consider how much debt to take on when developing your small business.
You need to consider your business goals, your business type, and the difference between good debt and bad debt. It would be best if you also looked into traditional, alternative, and government loans as you develop your small business.