Debt is often seen as an ugly word. On one hand it can be the single biggest factor that brings your business down if you are not careful. It can also be the vehicle that propels your business to new heights. There is a delicate balance in how, when and why you would consider using debt. Not all debt is a bad thing. If you utilize debt to increase revenue you are ahead of the game. However if your debt is pulling you down every month you may be working twice as hard just to stay in the same place. Most every business has some form of debt. The most successful ones know how to manage it. Here are a few pointers in dealing with business debt.
- List all debts. Do you know all of debts you currently have? This may seem like a loaded question but most business owners struggle with this. As a real estate investor your day consists of looking for new deals, networking, finishing rehab projects and dealing with whatever else comes your way. There is little time allocated to staying on top of your debts. The best way to deal with debt is to acknowledge it. Start by making a list of all the debts you have. You may need to pull a copy of your credit report or look at your bank statements to refresh your memory. In a spreadsheet or anything else you are comfortable with list all debts and include the interest rate, minimum monthly payment, total balance owed and due dates. This exercise may be alarming but it is the only way to view the big picture. Just one late payment can cause your credit score to take a hit. Before you figure out a game plan to deal with debt you need to know exactly what you are working with.
- Good debt vs. bad debt. As we mentioned in the opening not all debt is bad debt. There are times that taking on new debt is a savvy move. An example of this may be adding on debt to get a direct mailing campaign off the ground. Any debt that is used to add value to your business or increase revenue can be seen as good debt. Bad debt is taking on credit that does nothing to grow your business. Fancy furniture for your office or a three day vacation is examples of bad debt. You will pay for these items long after you finish using the good or service. In a perfect world you will pay down any debt as soon as you generate revenue from the product. It is tempting to use these funds for personal reasons but you need to stay disciplined. It is when you lose focus for a month or two that debts begin to pile up. Before you take on any new debt you need to ask yourself if it is good or bad debt.
- Payment plan. Once you know when all of your accounts are due you need to make a plan to pay them. The best way to handle this is by setting up automatic payments through a dedicated account. Many people don’t like this because they never know exactly how much they have in their account at any given time. An alternative is to make a calendar when each item is due and how you are going to pay it. Every time income enters the business you should think about paying debt. You don’t necessarily need to wipe all of it away in one shot but you can’t keep piling it up. When you have surplus capital you need to pay down as much of your debts as possible. Even in lean times you should always try to pay more than the minimum payment. The longer you are paying high interest rate balances the more your business stays stuck in neutral.
- Understand cost of credit. When is the last time you read the fine print of your account statement? What you may find is often alarming. For starters your interest rate can be anywhere from zero to 18% based on your credit history and score. The interest is compounding meaning that your monthly payment is only knocking down a fraction of your balance owed every month. On a card with a high balance of $1,000 you will make payments three or four times that over the life of the card. This underscores the reason you need to pay down your high interest rate cards as quickly as possible. Even though it may seem like a foreign language you need to examine your next monthly statement. Doing this may open your eyes to some of the negative aspects of excessive debt.
- Keep your eyes open. The credit card industry is a billion dollar industry. All you need to do is turn on the TV for twenty minutes and you are likely to see at least one credit card commercial. You shouldn’t be so quick to dismiss every credit card mailing you receive. Some of these are filled with opportunities to transfer high rate and balance cards to low introductory rates. Like anything else you need to read the fine print but some of these transfers can save you hundreds of dollars every month. All it takes is a couple of seconds to glance at a mailing or postcard you receive in the mail. Before you quickly toss them in the trash take some time and give them a look.
Controlling your debts often equals a successful business. This isn’t always easy at times but is the best thing you can do. Dealing with debt can be draining at times but everything can change for the better in a matter of just a few months.