Debt and loans are not always bad within your business, especially if you use them wisely.
Growing up, I was always taught debt was bad: if you’re getting in debt, you are living beyond your means. This is correct when you look at it from a personal perspective, but debt and loans can help your business grow if you’re using them in the correct way.
So, watch my video or read below to find out more.
Don't be Scared
After hearing debt is bad, you should not be scared, especially if you are in a growing business, as you need that capital to help you grow further.
So, if you are using capital to grow your business, this is sometimes a good thing, but you must have a plan for your business. So, what is your plan? And if you haven’t got one, I would be formulating one as action number one. If part of your plan is to grow, and you need capital to do that, that capital could be well invested within your business, and borrowing a loan can help you achieve your growth perspective.
Good debt vs. bad debt
Good debt is when you’re looking for growth; you’re looking for opportunities with the help of a loan. An example could be a construction company needing specific machinery, which can cost thousands of pounds. But, with this machinery, they will be able to have a return on investment, as they are able to complete more jobs in less time.
Another example could be getting new team members; if you’ve got lots of work flooding in, you need people to do the work, and you might need an initial influx of capital to be able to pay the wages for them until you then become more profitable.
That’s a good use of loans.
The bad use of the loan: When your business is failing, you’ve got no plan, you’re not making any profits, and all the loan will do is get you through the losses; this is not solving any problem.
If a business continues to make losses, you have a problem, and a loan won’t fix that, and ignoring them is only just extending the problem.
can you really afford it?
With a loan or any finance, consider if you can really afford it. You have to consider the interest rates before committing to a loan, and interest rates are on the rise at the moment. If you are in a position where you can repay the loan and afford the interest, then this still could be a beneficial product for your business, but you need to make sure that this is calculated in your financial plan.
The benefits
Finance is amazing because it allows you to grow faster. I have worked with many business owners who achieved big and quick growth with the help of finance.
So, loans allow you to achieve your goals quicker, as without a loan, you might have to save up for years before you can buy that machinery. But if you’ve got the loan, you could do it instantly; you can get that machinery and extra time so you can focus more on growing your business. But make sure there is a plan behind it. Because if you’re getting loans just chucked around everywhere without a real strategy, you are potentially going to become poorer.
Strategy
Without clear planning and strategy, the loan may not be enough. Within your business, are you currently doing a cash flow forecast? Are you currently doing budgets and regular management accounts?
If you’re not sure what management accounts are, check out my video. It explains exactly what management accounts are and how they benefit you and your business.
Just remember loans if you’re making bad decisions or you’ve got a company that’s got major problems and it’s burning money via losses will not save you. So, make sure that you’ve got proper strategy planning and reporting in place to see exactly how well you are doing month to month.
There is no plan to survive battle ever; they all have scars and wounds, but you need to make sure that although you may have a very ambitious growth plan, what are the strategies if it doesn’t quite work out?
Have you got a strategy where you’ll be able to keep up their monthly repayments for the loan and absorb the cost within your profit loss account?
So, what is your backup plan, if your growth plans are not successful?
I hope this video has inspired you. But if there are any questions that I can help with, please click my Calendly link below. This will allow you to book a discovery call with me for 30 minutes to take on board any questions you might have.
