Does Your Business Have The Wrong Kind Of Debt?
There is a great deal of discussion currently around the world with regards to debt instruments and interest rates. Most growing companies need to take on some amount of debt to fund growth, but debt at exorbitant interest rates is often called “the wrong kind” of debt. Choosing the wrong kind of debt for your business or having too much debt can be detrimental to the business’s lifespan and success.
What is the “wrong” kind of debt to amass in business?
The following would make the list: credit card debt, car-dealership vehicle loans/leases, personal loans at high rates, high mortgage balance, etc. But in reality, the wrong kind of debt should be thought of as any debt that is either not necessary or can be refinanced at terms that are more favorable.
To remove bad debt from your business, plan to systematically review every outstanding loan and try to find a way to either pay it off (without compromising growth, of course) or refinance at a lower rate. It will take time to organize your debts and search for alternative options that are more attractive for your business, but will pay off in the long run.
If you have expensive debt (such as credit card balances), you should work to determine what other financing options are available to your business. If your company is profitable — or is showing strong signs of coming profitability — it’s likely that lenders will work with you to refinance at a lower rate. Don’t think of this as a favor they are doing for you. Rather, think of it as good business for the lender. These financial companies are in business to make money from loans. If you bring a good credit history and a viable business record to them, they’ll seriously consider lending you money and getting you out of the unnecessarily high payments you’re making. Doing so will make your company all the more profitable.
The debt that your business is currently carrying is something that you should address annually. Not only is it important in terms of saving your business money on an annual basis, but it can save you money in the long term when you are seeking capital financing or even a potential business sale.
Moving forward, work in a proactive manner to determine what the appropriate debt to asset ratio is for your business. And, be sure to research the available types of debt and their advantages and disadvantages. With this information, your business will be in a better position to determine which options are the best for your specific needs.