With Debt Financing, Be Careful What You Wish For

Debt Financing Comes With An Obligation to Pay

Entrepreneurs tend to be a passionate lot, which is why many of them end up becoming successful, but this can also work against them with respect to debt financing.

The other side of the coin that comes with this passion is the blind belief that they are just one more mile away from achieving their goals, so do whatever it takes to get there.

Too much of what I see online regarding business financing is about how to manipulate the system or application process to get financing of some sort, whether it be credit cards, lines of credit, term loans, etc.  Lenders feed this somewhat through the way access to debt is so causally portrayed in their marketing.

And in many cases, at least in the initial going, people can be quite successful securing significant amounts of debt based on a decent credit score and close attention to the application process.

I guess if you’re able to strategically get your hands on this type of debt financing and constructively apply it and profit from it, then good on you.

But when you take on large sums of mostly unsecured debt financing in the form of credit cards and lines of credit and personal loans, you are also putting a gun to your head to make things happen quickly.  If results don’t materialize, your finances can hit the skids hard in a number of ways.

First, the debt is going to carry an interest rate, and in many cases, a high one.  Almost immediate cash flow will be required to service the costs of debt.

Second, high ongoing utilization of  debt will significantly reduce your credit score, making it next to impossible to borrow anything further.

Third, while some of the debt may be in the form of business credit, its likely to still have you personally liable for the balance owing.  Incorporation does not protect you from this debt in many cases.

Fourth, if you are more than 30 days late on a credit card payment, you will get a severe reduction in your credit score and more than one of these can have a damaging impact that can last years.

Fifth, this type of debt financing is usually all demand written meaning that the lender can ask for their money back at any time for any reason.  So even if you feel you’re on top of things, everything can do sideways in a hurry without any warning.

Sixth, if you fail to pay back the debt, your credit is shot.  If you have to go as far as a consumer proposal or bankruptcy to get out of the mess, then we’re talking up to 10 years to rebuild your credit, which is impacting more and more aspects of our daily lives.

Did you know that many companies now want to check your credit before making a hiring decision.  Why?  Because many of them think that a good credit profile is an indication of character.  Same can be true of other things you may apply for over the course of your life.

The value of good credit is growing and needs to be protected.

My point is that sometimes debt financing may be too easy to come by, or someone clever figures out how to “game” the system enough that they get access to more business financing capital than they can actually handle.

And because everyone is always in such a rush, they don’t always stop and think about the potential downside of what they’re doing.

Because business financing for small businesses, especially start ups, is hard to come by, many entrepreneurs turn to personally secured credit cards and lines of credit to fund their business ventures.  Many of the same individuals also wish they had never taken this path.

For the pure type A entrepreneur,  going bankrupt is a temporary set back and they will continue to roll the dice until they get the success they desire, regardless of how much of other peoples money they lose along the way.

However, for most business owners that fall into a debt financing hell they can’t get out of, the resulting fallout can be not only financially devastating for a long period  of time, but emotionally devastating as well.

So, be careful what you wish for.  Only take money you are confident you can pay back and make sure that whatever capital you secure has repayment terms in keeping with the road you’re going down.  Yes, there is always a risk, but if you’re aware of the risk and take it into account before acquiring debt financing, then you’re practicing very responsible and sound financial management.

If things don’t work out, always make sure you can fight another day.

In the end, you’ll sleep a lot better, at least most of you will.

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About the Author Brent Finlay