How to help your business deal with the debt paradox

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A trend that I often see in small and medium-sized businesses is that they are afraid of going into debt after getting out of the “start-up” phase of their lifecycle.

When we start our businesses, we are very excited to get started and are ready to sell our firstborn to do so. We are in debt and doing whatever it takes to be operational. We accept risk and stress because we know it is necessary to achieve our goals of owning our own business.

The first few years are often difficult as we struggle to understand our model and make all of our monthly payments on time. If things go well, we are successful. When our business is finally back on a solid footing, we naturally never want to see another loan repayment or have the same stress again. We become complacent and inevitably start working in our business rather than on it. We decide to use the extra cash flow to slowly grow our business year over year. Exciting, isn’t it?

However, I urge you to reconsider because this is the paradox. We finally found a model that actually works! It is less risky to borrow money at this stage to grow than before because you are not starting from scratch. You have a proven business plan. Now is the time to scale up and add fuel to the fire.

Just try to make sure you follow these three principles before you incur debt.

1. Never borrow money without a plan

When looking to borrow money for your business, you should always have a strong thesis on how much money you need, what you are going to do with it, and how it will help your business. Your plan might not work and it sure will change, but you need a plan and you need to understand the worst-case scenario. You also need to be sure that if the investments don’t work out as expected, you can still handle the monthly payments.

2. Make your loan structure match your needs and uses.

If you are planning to invest in your business and need a capital injection to make it happen, you should do it with term debt. If you need working capital to handle seasonality and timing of customer payments, etc., this is called a line of credit. You need to use the right loan for your needs. Know all of your options and speak to a professional before making a decision.

3. The most important thing is a good night’s sleep

If you know that taking on a certain amount of debt will stress you out and turn you around overnight, don’t. My goal is never to convince someone to go into debt they are not comfortable with. My main goal is to get business owners to think hard, consider all of their options, and make a decision. Too often, I see debt as a viable option for growth solely because of negative associations.

If you are feeling stuck, constantly working in your business, and not sure whether you are ready to grow, I always suggest joining a peer group of entrepreneurs. Just hearing other entrepreneurs talk about similar challenges they’ve faced and solutions that have or haven’t worked for them is very beneficial. The group also holds you accountable. Without accountability, it is too easy to say that “someday” we will start working to achieve our goals. Hope listening to the stories of other entrepreneurs will help you rekindle that spark that you missed.

The opinions expressed here by the columnists of Inc.com are theirs and not those of Inc.com.

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