A good debt generally means owing money for something that could help grow your wealth. Classic examples are mortgages and student loans, because houses usually appreciate over time and education is typically synonymous with success. And so as business ownership, or is it?
It’s safe to say that any entrepreneur wants to start up a venture to make profits. And to obtain sufficient capital, applying for a business loan is usually necessary. On paper, this type of debt is positive because it promises better returns.
However, operating a business doesn’t guarantee anything. Even if your objective is to generate revenue, there’s no certainty your plan is going to pan out. If it doesn’t, your debt would turn out to be bad.
Because of this possibility, is there any way you can avoid this? Actually, here are some advice to help you calculate the risks you’re going to take:
Don’t Depend Just on the Loan
There’s nothing wrong about acquiring your capital from companies offering lending to businesses, but the problem happens when you rely solely or heavily on them. The bigger the amount you borrow, the greater your monthly payments can be. As an overhead, your repayment reduces your net profits, thus minimizes the amount you’d take home.
A considerable portion of your working capital should come from your savings, or any source that involves no interest.
Don’t Say Yes to a Bad Deal
Most, if not all, loans are negotiable. You may ask the lender for a longer term or lower the interest to make your repayments easier to handle. Signing on the dotted line even if the deal is not favorable to your situation could mean trouble.
Don’t Borrow Money More Than You Can Pay
Maybe you’re in a better financial position when you apply for your first loan, but the case may be different when you loan some more. Additional financing is usually not a risky bet when your business has proven to generate steady profits, and you want to expand. Otherwise, it might just add to your worries.
Acquiring debts usually leads to good fortune for the financially prudent. Take time to assess your situation, and study your market thoroughly to lower the level of risk in your venture.