Debt – a business companion

Directroute November 03, 2011 Uncategorized No Comments

Debt is something that many businesses are getting used to living with, and although we may have been told ‘neither a lender nor a borrower be’, it seems impossible these days to run a business that way. Conversely we are also encouraged to ‘speculate to accumulate’, and yet this too is also something that is more easily said than done if it is our own name on that cheque.

But is all debt, bad debt? Should it be avoided at all cost, with any debt that we do incur paid off at the soonest possible opportunity? Not necessarily. Some debt can be seen as good debt.

For example, if we consider our own personal debts, our mortgage could be viewed as a good debt. It is a debt incurred to enable us to buy our home, and if we are lucky and house prices rise over the lifetime of the debt, it can be seen as an investment. Similarly a debt incurred to facilitate training or education can also be considered an investment, with the qualifications and knowledge gained helping us to further our careers.

And the same rings true for businesses. If something of real value to the business is available, whether it be additional office space or a new piece of machinery, would it be wrong to incur debt in order to achieve it? Surely not. Incurring that debt at that particular time could help the business to expand to the next level, whereas ignoring the opportunity solely in order to avoid holding any debt may in fact condemn the business to many years of stagnation.

So whether a debt is good or bad can be determined by what the money has been spent on, and just as importantly, the timing of the spend. That new office space is unlikely to be seen as a good investment if attained at a time when the business is struggling to grow. However, struggling to keep a growing team in cramped conditions at a time when the business is flourishing will probably suppress or even extinguish any growth.

It is likely that a business will incur debt at some point in its lifetime, but it is the reasons that the debt was taken on that should define whether that debt is good or bad.

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