How Personal Debt Can Affect Your Business

Loans and credit are tools that can be used to help get a business off the ground. Many consumers apply for loans and credit cards for the purpose of purchasing assets and other necessary items without coming out of pocket. Debt can help to lift a business off the ground especially, when there are not personal assets that can be invested in the business to start out. Personal consumer debt can affect your business in many ways, both negatively and positively.

Personal Debt can Hold Your Personal Investment

When you have large amounts of personal debt to pay off, you may not have as much money to put into your business. Without money to invest in your own business, you may be reliant on the cycle of debt to put money into your business. Not having the money to invest into your own business can also be emotionally disheartening.

You Must Take a Larger Cut, so Less Employees

If you have personal debt that you must pay off while running your start up business, you may need to take a larger cut in your business than ordinary. This may mean that you cannot hire employees or talent to help get your business booming. In the long term, this strategy may cost you more money as your business may take a longer amount of time to be profitable.

You are Tempted to Take on More Debt

When you want to see your business grow, but cannot invest because of high personal debt, you may dig deeper into the cycle of debt in order to find the money to invest. This can come in the form of business loans, personal loans, or payday loans that may offer you the option to free up more cash for your business. While business and personal loans are not a bad idea for a startup, taking on more debt is sure to leave you with an even heavier burden on your shoulders.

You May Try to Move around Assets

The quickest way to tax confusion is consolidating the businesses assets with your personal assets. When you have high personal debt, you may be tempted to take assets from the business, or even have the business take pay off some of your debt. This can lead to confusion when it comes to tax time, which can spell major trouble for a business owner. It is important to know how to keep business assets and debt and personal assets and debt separate in your life.

Good Debt Vs Bad Debt

Many people feel that all debt is bad. They may even be in debt themselves but feel that it is not a good position to be in. However, it is important to realise that there are differences between good and bad debt.

What is Good Debt?

Good debt is something which could be seen as an investment or that helps you in a very positive way. It is not clear cut always as it may depend on a person’s circumstances as to whether the debt is good or bad for them. Some things are very obviously good debt, but others could be borderline. Some debts are very obviously bad debt.

Examples of Good Debt

An example of good debt would be interest free credit. This is where you borrow money but pay nothing to borrow it. However, you have to be cautious with this because you may find that if you are offered it by a company that are selling items, they may price these extra highly to allow for the cost of the debt. There will also be charges if the payments are not made in time, which is a risk of all debts.

Another example is when you borrow money to make an investment that will be worth more than the cost of the loan. It is quite rare to find a form of investment that does this and is not too risky but a house purchase is one example where this is the case. The mortgage will be expensive, but as the value of the house is likely to rise over time, you will tend to gain more than you pay out, especially in the very long term.

A student loan is another example of good debt. You are investing in your future as after college, you should be able to get a better paying job which will more than cover the price of the student loan.

A car loan could be a good debt. If you need a vehicle to get to work and the only way that you can pay for it, is to borrow the money, then the loan is good. However, if you do not need the car for work, then borrowing money to buy one may not be good debt.

Credit cards are good debt if you pay them off in full each month and pay no annual fee.

What is Bad Debt?

Not all debt is bad debt. Bad debt is something that costs a lot of money and the item you spend it on is not an investment. There are more examples of bad debt than good debt though.

Examples of Bad Debt

Credit cards are bad debt if you only pay back the minimum amount each month. The interest rates are high and it can take a very long time to pay them back.

An overdraft is another example of a bad debt. They can have high fees and there is no pressure to pay them back. An unauthorised overdraft can have a daily charge as well as interest and can be the most expensive way to borrow money if calculated in terms of the APR.

Personal loans, such as payday loans can be a very expensive way to borrow money. They are even dearer if the repayment is not made on time.

 

This is a guest post written by Travis Holmes.

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