Good debt or bad debt? Growing a business: Is credit the answer?
Position | Indiana SMALL * BUSINESS REFERENCE * GUIDE |
There comes a comfortable time in the evolution of most small businesses whereby the jitters that accompany the start-up phase are replaced by a calm assurance. You know what you are doing. Whereas money likely previously came in fits and starts, during the second phase of business things evens out--customers and income become more reliable and regular.
But even so, although income is steadier, another quandary usually arises, namely, what is the best way to grow the business? While using the profit that is now flowing into the business seems to make sense, it is actually problematic for two reasons. First, the profit may not be enough to make the desired changes (for example, opening a new store or engaging in increased advertising.) Second, earmarking business income for business growth may put the company back in a more precarious financial condition.
All of which begs the question: Is using credit the right way to grow the business? The answer depends on two things.
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What Do the Numbers Indicate? Entrepreneurs have many admirable characteristics: They tend to be creative, hard-working and motivated self-starters. Sometimes, however, they are not always strong with the numbers. But the fact is, if you are considering taking on debt to grow your business, you have to have a good grasp of basic business finance.
What will it cost you to open up that new store? If you do open it, how long will it take you to turn a profit and how much can you reasonably expect to make thereafter? The numbers will tell you.
Therefore, whether you should use credit to finance the growth stage of your business first of all depends upon creating a realistic financial forecast to go along with your budding plans. This business budget should detail what you plan to do, how much it will realistically cost, how much you can realistically expect to...
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