Why Business Owners Should Avoid Excessive Debt

Why Business Owners Should Avoid Excessive Debt

Running a small business takes money. There is the cost of inventory that will not be reimbursed until goods are actually sold. There is the cost of necessary office supplies and letterhead. Small businesses will also usually need to spend money on physical office space and necessary utilities. Finally, the biggest expense for small and large businesses alike is the cost of labor and the benefits that go with employees. Most industries have slow times in which their cash flow is much lower than it is for other parts of the year. This is the time in which borrowing money seems like a better alternative that tightening belts. It is important for the owners of these businesses to avoid excessive debt in this instance.

One of the biggest temptations a small business owner might have to buy some operating time is using a credit card. These financial tools can be a benefit, or they can be a major burden. Most cards have interest rates that are well over 10 percent. Those who are not able to pay off the debt quickly will have the interest compound and hurt their bottom lines. This is not the way to grow a business to a healthy level, and it can severely hamper future investment and expansion.

Debt should be avoided unless there is a high likelihood that it can be repaid relatively quickly. A retail establishment that has a large percentage of sales in the period between Thanksgiving and Christmas might need to borrow a bit to get through the lean times. They will then hopefully be able to pay back the debt and make money during the holiday shopping season. Of course, using a credit card for some necessary online purchases can make sense because of the convenience factor. Another option is taking out a personal or business loan from a local bank. These tend to have terms that are shorter and have lower interest rates than credit card debt.

There are other ways that credit cards can cost money. Credit card processing is not free. There is a fee that usually ranges between 1 and 2 percent for each swipe of the card. Of course, in a society that does not really carry much cash around, now having a merchant account that can take care of credit card purchases will usually lead to lost sales that will hurt overall business sales and lose potential profits.