Good Debt, Bad Debt
When starting a business, it is important to have a good credit history. If you plan on borrowing money for start-up costs, purchasing equipment, or investing in a business package or franchise, your lender will review your credit score. This will help them determine if you are “risk-worthy” or if they should deny your application.
It is not necessary to debt-free, however. What is important is how you manage your debt, and what type of debt you have. Paying on time each month, and paying the amount agreed upon, will help you develop a good credit rating. A debt-to-income ratio is also a number reviewed by lenders. If you are maxed out or almost maxed out on your ability to pay your bills now, it is unlikely they will view you as a risk.
However, you shouldn’t think that you should never have any debt. There is good debt and there is bad debt.
In a nutshell, bad debt is debt that will cost you money. Buying a luxury car, or taking an amazingly expensive vacation usually require that people borrow money to purchase them. Since they are not necessities, this is considered a bad debt because it will cost you in the long run. Credit card interest can mount up very quickly, so credit card debt is probably the most highly rated as bad debt. If you carry a balance on your credit card, you could be paying as much as 29% on your balance. Read the projected payoff amount on your next statement; you’ll be shocked at the cost of your debt! A luxury car, extreme vacations, and other items that are not “necessary” can easily add to your bad debt if you place these items on your credit card. It is amazing how much money it costs (interest) to have a balance on your card(s).
Bottom line, bad debt costs you money.
Good debt, on the other hand, is debt that will help you earn money. A loan to start your own business is a prime example of good debt. Borrowing to invest in a business package or franchise is an excellent plan, because you receive a business plan, experience, and support to help you succeed. By earning much more than the initial investment (loan), you will have incurred good debt.
The reason that borrowing funds to start a business is good debt is two-fold: 1) you are given the opportunity to receive a positive return on your investment, and 2) you will leverage your resources to help achieve success. For instance, Nationwide Inventory Professionals offers continued support to all Licensees by sharing knowledge, expertise, and coaching.
When planning on investing in a business, ask what financial options you have and choose the plan that’s best for you.