What’s a “healthy” amount of business debt?
By Minnillo & Jenkins, CO. LPA posted in Business Bankruptcy on Wednesday, June 10, 2020.
Most business owners anticipate costs upfront. Between loans, investments and property development, most entrepreneurs have to put in a lot of cash before they can see any profits in the future. But what’s a reasonable amount for business-related debt?
The answer is it depends. Most business debts rely on multiple factors like the industry you are entering into, your specific business structure and how you want your business to grow down the line.
The right perspective
If you want to know what’s a reasonable amount of debt, you ask about what expenses are crucial for your company’s success. According to Harj Taggar, co-founder and CEO of Triplebyte, thinking about how you spend your money may determine if it’s a reasonable expense for your company.
“Good debt is tied to something solid with a clear plan for why it’s helpful,” Tagger said to Business.com. “Bad debt is money you spend without understanding how it impacts your business.”
When you have clear intentions of how you want to spend your capital, you need to also look into different types of funding to cover those initial loans and costs. You can even raise financing through:
- friends and family
- personal savings
- angel investors
- state/federal grants
- other creditors
If you can gather other investors or partners, you may want to work with a business partner or a financial advisor to determine how to use your funds effectively. What is the best loan to reduce or should you reinvest money back into inventory? It’s great to ask other business-savvy minds about these questions to get more feedback.
The wrong move
There are cases where an owner takes every right step, but one wrong move leads them into more debt. You don’t want to depend on loans for daily operations or employees’ salaries. If you need more funds for those types of needs, you may want to consider a more drastic option, like bankruptcy.
Bankruptcy is a scary word to most small business owners, but it’s an incredibly helpful resource to businesses that want to stay open but lack the funds. If you aren’t sure, you can work with an account or advisor to determine all your options before you make a final decision.
Just remember that not all debt is bad! You need some debt to get a business off the ground, but do not rely on debt to keep your business afloat.
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