Have you ever thought of debt as a good thing? It can be when used correctly. That’s what we’ll discuss in this blog. We want to teach you to make debt a tool, not a burden.
You’ll learn how to change your mindset regarding debt, the differences between good and bad debt, and a simple four-step process you can use to ensure the debt you assume will be beneficial. Ready?
When Is Debt a Good Thing?
Most of us have been taught that debt is a very, very bad thing and that we should always strive to be debt free. Unfortunately, this mindset isn’t always accurate. While there are bad forms of debt that should be avoided, there’s also good debt.
So what makes debt good? Good debt is any low-interest loan that helps you achieve your goals. For example:
- Mortgages: Owning a home can have many lives and financial benefits. A mortgage is considered good debt as long as the homeowner is able to afford the monthly payments.
- Student Loans: We all hate them, and it may seem like we’ll never be able to pay them off completely. But our college education was an investment in our future. Many of us wouldn’t be where we are today without it.
- Business Loans: A business loan can be a form of good debt. If you use the capital to grow your business and make more money, your debt is a blessing rather than a burden. It all comes down to how you use the money.
If a debt helps you achieve your goals, it’s probably a good thing, despite what you’ve believed your whole life. But there’s also burdensome debts. Let’s talk more about those now.
When Debt Becomes a Burden
While the above loans are desirable when taken on at the right time and context, there are debts that should be avoided. Yes, these are the kind you grew up fearing. And rightfully so! Bad debt, such as the following examples, is a burden.
- Credit Card Debt: While there are exceptions, most credit cards charge high-interest rates, making it a long and difficult process to become debt free. If you have credit cards, you must exhibit self-control! Weak willpower can quickly lead to financial turmoil.
- Personal Loans: A loan of this type isn’t inherently bad. In fact, there are instances when a personal loan makes perfect sense. But borrowing money for optional personal purchases such as vacations, TVs, clothing, etc. is never a good idea. Again, exhibit willpower and resist the urge.
Now that we’ve covered the differences between good and bad debt, let’s talk about making debt a tool to propel your business and life forward.
Make Debt a Tool in 4 Easy Steps
When understood and used correctly, debt becomes a tool rather than a burden. The following four steps will show you how to use debt to your advantage.
1. Change Your Mindset
First things first, your mindset needs to change regarding debt. It’s not necessarily a bad thing. It completely depends on the person assuming the capital and their plans to use it. When you begin to see a loan as an opportunity rather than a burden, you’ll be ready to use debt as a tool.
Start focusing on the benefits of debt — you’ll finally have the capital to invest in new product creation, more employees, a better website, etc. Whatever it is your business needs, debt, used properly, can help you get it.
2. Know Your Goals
A loan without a purpose is bad debt. What do you want capital for? Out of those reasons, will any of them help you grow your business, secure more customers, and ultimately make more money in the future?
Before taking on any debt, evaluate your business and identify how you’ll use the extra capital. Then decide whether the funds will be worth the price you’ll pay (interest) for acquiring them.
3. Acknowledge Risk
No assumption of debt, no matter how well prepared you to believe you are, is completely free of risk. You need to realize that before taking out any business loan. Are you willing to accept the consequences if things don’t work out the way you’ve planned?
If not, you should reconsider your options. Debt equals risk. The trick is minimizing your risk and giving your business the highest chance of success. You do this by knowing exactly what you need capital for and being disciplined in your spending.
4. Spend Wisely
Finally, any capital you acquire should be spent wisely. Continually evaluate your plans. Are things progressing the way you hoped or do you need to pivot? Good debt can quickly become bad debt when funds are mismanaged. Always ensure that the money you spend will help you get closer to your goals.
Good Debt In Action
M&M Painting is a perfect example of good debt in action. A successful small business, M&M always had a healthy pipeline of projects and minimal cash flow issues. The problem? They had zero resources to grow beyond their current state.
After partnering with Cast Capital Funding and receiving a 75K business loan, M&M was able to expand their business, double their revenue within six months, and improve their credit score. You can read the full story here.
This amazing story was possible because M&M understood the difference between good and bad debt, and knew exactly how they wanted to spend their capital before they received it. It’s very possible that your business can experience the same results!
Wrapping Up
Whether the debt is classified as good or bad really just depends on how a business uses the funds it receives. If the additional capital is used to bring a company closer to its goal, the investment is sound.
How do you view debt? Hopefully, this blog has helped you change your mindset! If you’re wanting to grow your business, but don’t currently have the resources, Cast Capital would love to help you reach your goals.
Contact us for a FREE consultation today. Our financial experts are ready to devise a customized plan for your business to help you reach your goals.