Debt is a facet of the 21st century. The average US household will hold up to $9,600 of credit card debt alone. Businesses are not completely safe from this, either. They're constantly getting into needless debt because they assume they'll take off and be able to pay it back later.
For example, the biggest mistake companies make when developing an app is spending too much on it. With the payments industry ripe for disruption and interest rates threatening to increase, this is not a good time to be in debt.
This guide is going to introduce you to the major debt problems of today and why you need to protect your business when taking out a loan.
The Current Situation
Cheap money is everywhere now. Many banks are offering 0% interest rates, and a lot of startups are biting because they see it as easy money. It's a good strategy for building up your share price and inflating the value of your company. The problem is this can't last forever. You need more sustainable working capital loan options if you're going to survive into the future.
And does the current situation promote growth?
Acquiring alternate financing right now will promote growth in your company. The problem is this is a type of false growth. It's not making debt work for you because you don't have any foundations in place to pay back that debt, or stomach any interest rate increases.
It's growing based on instability, which isn't sustainable in the long-term.
Debt is Always a Drag
Debt will always drag your company down. Ideally, you would never take on any debt at all. The average startup would find this near impossible, though. Unless you have a lot of personal funds to inject into the company you need to borrow from someone.
It just depends how much strain you're placing on your company. Large amounts of debt will stop you from succeeding. Understand that growth can never be brought through debt and equity financing.
How to Promote Real Growth
The first way to promote real growth is your products and services. Keep customers happy and maintain a strong customer buzz. Meet the demands of the market. This is the bulletproof method to promote growth because nothing can bring your company down. It's all about building those long-term revenue streams.
The only way you're going to profit is to make sure you're not servicing any debt. And any debt you're servicing should be manageable. Keep your expenses low to build your bottom line.
Finally, you promote real growth through avoiding any major risks. You will always have to take calculated risks, but taking out that huge loan is never going to give you the success you crave. It's only going to drag your company down in the long-term.
So How Do You Manage Debt in a Responsible Way?
This article seems to say that you should never take on any debt. That couldn't be further from the truth because it can come in handy. As already mentioned, debt is unavoidable for most startups. Even a small credit card debt could be necessary to get you through the next month.
But you have to make sure the debt you do take out is manageable. Think about the reasons you're going into debt in the first place. You should only go into debt for capital expenses purposes. In plain English, you should only take out a loan when it's being put towards something that's going to increase your revenue streams in the long-term.
Taking out loans because there's cheap money available is essentially about taking on unnecessary risk for your company. Build up some great products and attract customer loyalty. It's the only way you're going to build a sustainable company.
Last Word - Finding a Responsible Lender
The rush for cheap money is a mistake because it encourages companies to take on debt they never would have taken on otherwise. You need to focus on finding a responsible lender who will give you a great deal, without encouraging you to take more than you need.
It all starts with research. Conduct your research and figure out what type of loan is going to work best for you. For example, it makes little sense to take out a bank loan if you only need a few hundred dollars. A credit card would be far better for your purposes.
What do you think about the subject of corporate debt in the 21st century?