Last week, I talked about dumping your worries in the right place. Well, there’s another thing to get rid of this week.
I hate sitting down with a business owner who got in over their head with financing. Unfortunately, it’s sometimes too late when I do — and the potential solutions end up being moot.
It’s a scary economic world right now. And it’s also a world in which good lines of credit are increasingly difficult to come by for the business owner.
If you don’t watch out, you can get into some hot water with the credit you use. I’ve seen it more times than I’d like, with my business-owner clients and friends.
I don’t want that to happen to you, Christy. It’s true, I have helped execute some near-miraculous rescues from situations like this for clients in the past, but sometimes it’s just too late when I have the opportunity to help.
So, I’ve put together a short primer on the subject, in hopes that I might be an effective resource for you in more ways than one.
“Real World” Business Strategy Note
Dumping Bad Debt
“The man who makes no mistakes does not usually make anything.” – Edward Phelps
There’s a lot of discussion going on around the world about debt instruments and interest rates. We’re all seeing the consequences of the dangers of municipal debt.
And it’s true: most growing companies need to take on some amount of debt to fund growth, though debt at exorbitant interest rates is obviously “the wrong kind” of debt.
But choosing the wrong kind of debt for your business (or having too much debt) can be a killer to your business’ lifespan and success.
So, 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
* A high mortgage balance
But in reality, the wrong kind of debt should be thought of as any debt that is either not necessary — or which could be refinanced at terms which are more favorable.
To remove bad debt from your business, you must 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 it 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 it 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.
And a tip: 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 at better terms and getting you out of the unnecessarily high payments you’re making.
Doing so will make your company all the more profitable.
Valerie McLaughlin, EA