Small Business Owners Battle Debt
America is drowning in debt. Both consumers and small business owners are facility massive debt growth using credit cards.
How high is your credit card debt? How much are you spending in monthly interest? How soon can you pay it off?
It is important to have a plan. To examine the cost of carrying business credit card debt. Some credit cards are charging up to 24%. How does this make sense?
If you have $10,000 in business credit cards debt at an interest rate of 10% you would be spending a minimum $1,000 on interest. If the rate is 20% — you would be spending $2,000 per year. How does this affect your bottom line? Does it make sense to carry business credit card debt for long periods of time?
How Debt Impact a Business
There are many reasons why a business owner will use business credit cards, personal credit cards, and loans for the business. It may be to cover short-term working capital needs or to participate in opportunity or to fund a new project. These are good reasons. But it is even more important to have a plan on how you will pay off the debt. Debt can waste valuable earnings and leave the business vulnerable to insolvency. It can also be a vehicle for growth.
Key: have a plan on how the debt will be paid off.
Types of Debt:
- Long-term Business Loan: a Small Business Administration loan or bank loan.
- Term-Loan: usually 2-3 years in length.
- Merchant Cash Advance: short term advance on future sales. Based on merchant account details. Very expensive.
- Business Credit Cards: monthly minimums. Can be short-term or long-term. Used as needed. More expensive since unsecured.
- Equipment Financing: terms may be favorable since there is an asset involved.
- Invoice Factoring: usually 1-2 per month on the amount borrowed on the invoice.
- Vehicle Financing: terms can be favorable since there is an asset involved.
- Real Estate Loan: usually long-term and provides the opportunity for depreciation.
Regardless of the financing, make sure that the business will be able to generate enough income to make payments on the debt. It has to make sense for the business. Does the new debt solve an issue, and increase sales? Does it solve a business need that is essential?