Episode Transcript
[00:00:00] Welcome to another episode of financial Snickens. I'm your host, Alisa McCabe. And today we're going to be talking about financial reporting. Scratch that. Start again. Welcome to another episode of financial Snickens. I'm your host, Alisa McCabe. And we are continuing with our series on financial reporting for small businesses.
Today, we're going to be talking about smart debt management. Now, I always thought it was pretty interesting when people said there's A difference between good debt and bad debt, and we are going to talk about how you can leverage debt wisely, how you can distinguish between good and bad debt, and how you can manage So first we're going to start with the [00:01:00] difference between good and bad debt, and it's, it's interesting because this happens quite often and more often than you would think, because so many small business owners go and get loans.
They have something available to them, so they, they get a loan. But the difference between a good, a good debt and a bad debt is a good debt is incurred for strategic investments. That means that you are looking to get, um, debt that is going to make you money. Not debt to pay down expenses. So one of the things that, um, you really need to contemplate is, you know, good debt is looking for funds to expand your current business, um, to purchase a piece of innovative technology that is going to keep you competitive and help you to do your work better.[00:02:00]
Something else that good debt also has. It's low interest rates. So you need to look for options with low interest rates. While, you know, interest is an inherent part of having debt and borrowing, minimizing these costs really does ensure that the benefits you're getting from the borrowed money outweighs the financial burden.
What are the pitfalls that you need to avoid? Okay, so bad debt is, often comes from unnecessary expenses or impulse spending. So bad debt really is an issue. So before taking on any debt, you really need to critically assess whether the expenditure contributes to the business's growth and sustainability.
Also, another thing that bad debt has as a [00:03:00] characteristic is high interest. So, you do not want to have high interest options and sometimes What can happen? And I, we see this a lot with small business owners. They are offered short term loans for high credit for, um, high interest rates. And
although this may be tempting, if you are not able to pay it off quickly, and you haven't figured out the financial,
if you haven't figured out the financial burden of what those high interest rates are going to cost you, then you You really aren't sure what the fees are and if the loan outweighs what you're getting from having, from taking advantage of this loan. [00:04:00] So, it's never a good idea to take out a loan to pay expenses.
I can't tell you how many times I've said that to business owners, where they're stuck in debt, they're drowning in credit card debt or something, and they take out a loan to pay it. We've even had clients who want to take out a loan to pay their taxes. While these things might seem like a good way out of a situation, long term, they're not solutions.
So one of the things that we try to talk to our clients about is how to leverage this debt wisely. And in the situation where it's, where you're taking out loans to pay off expenses, it's not increasing the value of your company. It is not moving your company towards growth and it's not achieving your goals.
What you can do before taking on any debt. Make sure you [00:05:00] have established what the objectives are for its use, whether it's for operations or it's for upgrading technology or hiring additional staff, whatever it is, make sure this debt aligns with your long term goals. What are those strategic plans? And does that.
Align with it. Also, explore different financing, financing options. Make sure you find the options that are most suitable for you. And, you know, it might be traditional loans, it might be a line of credit, or it might be alternative financing. Each option comes with its own set terms and conditions, and you need to choose wisely based on what your business really needs.
Next, create a realistic repayment plan. So the plan needs to be realistic and it needs to be sustainable. So [00:06:00] understanding how these cash, how these understanding how these repayments are going to affect the cashflow in your business and to ensure that the cashflow can be comfortably managed with the debt burden without compromising your day to day operations.
So if you do have debt, you need to manage it effectively. So prior to, prioritize any high interest debt. It's interesting because this just, this is something that, uh, kids with student loans actually go through. And when they look at all their student loans after they graduate. They prioritize the high interest rates, same for small business.
Anything that you have on a credit card that you have not paid off, prioritize. I saw an interest rate on a credit card the other day, 31%. It's insane. [00:07:00] So pay those off first. The um, if you have a, if you owe taxes with the IRS, I've seen those as high as 17%. Pay those off first if you are having trouble paying those or or you you made a bad decision Everybody does it it happens trying to negotiate the term with the creditors Try to manage this debt and get it down to a lower interest rate lower payments something that makes it more manageable to for you also Don't just set it and forget it Regularly monitor this financial situation and you are going to throughout your business year or lifetime.
You're going to experience. Uh, different shifts in revenue and be prepared for that because there might be times when you have additional revenue and be ready to use any profits from that to pay down [00:08:00] high interest loans to pay down those high debts and be able to take advantage of opportunity and flexibility is the key to long term success when it comes to making these strategies work for you and work for your company.
So smart debt management is an essential skill and this is something that small business owners need to get a good grasp on and to understand before taking any loans or making that decision of where you're, the money is going to come from for that expenditure that you want to make. So make sure it offers.
Potential for good growth while minimizing the financial risks and then also distinguish between that good debt and the bad debt levering, leveraging your debt wisely and implementing effective repayment strategies so that you [00:09:00] can have enough money to run your business. And pay off this investment. If you want to talk more about managing debt and what you can do to help your company grow and maybe not take out a loan, head over to our website, firststepsfinancial.
com and we can talk more about how to utilize debt to create success.
