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How much debt is too much debt? Whether you’re managing a dental office, expanding a dealership or starting your own law firm, choosing the right kind of debt can be a smart move for your business – and your future.
Taking on debt can be intimidating. But with a strategic mindset, it can also be an essential tool for growth. Let’s break down how to differentiate between healthy vs. harmful debt and how to use it to move your business forward.
The Basics of Business Debt:
Good debt = investment-focused
Not all debt is created equal. In fact, healthy debt can drive growth and ultimately take your business to the next level.
Whether you’re considering expansion, purchasing new equipment or upgrading your technology, business loans can be a smart way to invest in the future of your business. With flexible terms and low-to-moderate interest rates, these types of loans are designed to deliver a return on your investment and ultimately increase your bottom line.
Bad debt = consumption-focused
In contrast, harmful debt is accumulated without a clear financial benefit and can burden your resources. High interest rates and a lack of return make it harder to repay.
Unhealthy debt is typically used for non-essential expenses or other needs without any plan to increase revenue.
What’s the ideal debt-to-income (DTI) ratio? As a good rule of thumb, aim for a DTI ratio around 40%. This allows you to keep debt manageable, maintain operational flexibility and seize growth opportunities when they arise.
If you’re wondering if your debt may be getting out of hand, watch for these warning signs:
So what’s the best place to start?
Organize your debts by interest rate and due date. Focus on paying off high-interest debt first to reduce the total interest you owe.
Explore refinancing options to lower your interest rates, which can help decrease your monthly payments and improve your cash flow.
Look for creative ways to bring in more business, such as adding new services or targeting untapped client markets.
Before taking on any new debt, ensure it aligns with your growth strategy and will improve your business’s long-term success.
Depending on your situation, a debt consolidation loan may also be a smart option for your business – allowing you to transfer account balances from credit cards, lines of credit or installment loans into a single loan with a single monthly payment. If you’re curious about running the numbers, try our quick business debt consolidation calculator!
In short, focus on debt that will help propel your business forward. Remember, understanding the difference between good vs. bad debt will be key to your business’s long-term success. Managing it effectively will be, too.
Oh, and if you need a hand, contact us anytime. Whatever’s on your mind, let us assist you with finding the right financial solutions to keep your business moving forward. We’d love to help!
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