Many start-up businesses fail to thrive because they take on too much debt, have insufficient capital or have poor credit. Staying completely debt free is probably not possible, nor is it necessarily advisable for businesses looking to expand. The important thing is for businesses to make intelligent decisions relative to debt.
Maintaining a high level of debt will make it difficult to take advantage of new opportunities or weather any temporary setbacks or downturns in the business or the economy. Too much debt can significantly impact the business’ credit rating and make it more difficult for the business to obtain credit from necessary vendors, suppliers and customers.
Another significant downside of carrying too much debt and having a poor credit history is the impact it may have on the business’ ability to accept and process credit card payments. The simple fact is that the ability to accept credit card payments makes it more likely that a bricks and mortar business will survive. The ability to accept credit card payments is absolutely vital for businesses with a significant online presence. Having poor credit or a spotty financial picture may make it more difficult to open merchant accounts for credit card processing. Even a marginally questionable credit and financial history may mean that the new business has to pay more or agree to less favorable terms for its merchant accounts that offer credit card processing.
So, how does a business owner decide if a debt is a “good” debt or a “bad” debt? A lot depends on the business, but as a general guideline, businesses should use debt to finance the acquisition of assets that are going to be used in the business for years. Examples include office furniture, computers and delivery trucks. On the other hand, ongoing bills such as electricity and salaries should come out of the business’ operating cash flow.
Starting a new business is exciting, but it is also a very challenging endeavor that can be derailed by making poor financial decisions. One government agency has estimated that more than half of all start-up businesses fail because of poor credit or financial decisions. For that reason, it is very important that business owners create a business plan that addresses the amount and type of financing that is going to be required to successfully launch the business.