From an early age, I have been trained by my parents that debt is bad. The most frequent justification for this belief is that debt reduces your
total net worth and your financial flexibility. As an online entrepeneur, I've found that while my parents' advice is 100% correct in regards to
personal finance, a different way of conceptualizing debt is needed when it comes to business finance.
Debt, like any other tool, can be used negatively or positively depending on the circumstance you find yourself in using it. When you are growing
your online business, debt may not be a purely negative thing since it allows you to leverage existing assets and maximize your ability to
grow your business quickly.
Of course, there are definite traps to avoid when using debt as a tool to grow your business.
Trap #1 Undisciplined use of Debt
If you treat your credit card as a piggy bank which you frequently dip into for the smallest and most frequent expenses your business
faces, you may easily find yourself so deep in debt that whatever income your business generates becomes immaterial.
Treat your credit card as a tool to pay for STRATEGIC expenses. These expenses should have the very real possibility of generating
revenues or increasing efficiency which generates revenue.
Create a hierarchy in your decision making before choosing to use debt. Put strategic expenses at the top and non-strategic/non essential
expenses at the bottom. Spend credit resources based on this hierarchy.
Trap #2 Untimely use of Debt
Just as there's a hierarchy in the THINGS you wish to buy, you should employ a hierarchy in the TIMING of your purchases.
Debt should only be employed when revenue closely appears to be unable to cover your expenses. However, if it's still too early and
revenue might pick up, hold off on whipping out that credit card.
Similarly, use debt for business EXPANSION only when it appears that revenue is ramping up and can be accellerated with strategic
reinvestment into your business via debt. If revenue is anemic, make sure to fine tune your business model and increase revenue before
you resort to using credit.
Trap #3 Addiction to Credit
Sometimes even businesses with the best potential and significant revenues fail because the owner has failed to get out of the "strategic
debt usage" mindset. Debt is only a tool. Don't be afraid to stop using the tool and start using cash when you are able to. Sometimes, its hard
to shake a mental habit. However, your mental attitude must change and conform to your material condition--once you have a cashflow, start
using that cash. Being stuck in "survival" mode while your company is actually flourishing may mean the eventual death of your
company due to ineffective management of assets.
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