We tend to hear a lot of negative press about personal debt. The message has been loud and clear for more than a decade that debt is too high, and we need to rein in our spending.
But going into debt can be an essential part of being financially successful. In fact, it was one of the earliest observations that economists made. Entrepreneurs take on debt because the return on their investment is higher than the interest on the loan.
That’s essentially the difference between successful people and those who just get by. Successful people realise that the only way to make a lot of money is to take control of resources. That means taking control of plant and equipment or a business brand. Or it could even mean taking control of a competent team of people.
And they realise that to do that they often need to take on debt. But it’s a good form of debt. That’s because it’s the sort of debt that is going to make them a lot of money in the future.
Starting A Business
Debts and personal loans can be a force for good if they’re the foundation of a new business. Perhaps you’ve seen a new opportunity in your area to provide a service that nobody else is providing. Or maybe you have spotted a gap in the market that can be exploited.
Of course, with any investment, there is also risk. But this is the sort of thing credit markets were initially set up to do. They were a way of giving the best entrepreneurs cash so that both they and the investor could make a return.
In a world saturated with credit, we’ve forgotten what credit is really for. It’s about giving up a bit of income today so that we can make more tomorrow. And that’s why starting a business is as good a reason as any for going into debt.
Expanding A Business
Business environments change rapidly. One minute you’re getting 100 orders per week. And then the next you’re upwards of 1,000.
Firms that experience a dramatic rise in their demand should also consider going into debt. Essentially, it’s the same principle in operation as before. Going into debt now means that you’ll be able to make more money in the future.
Often businesses need money to react to additional demand. But it could also be that you’ve seen an opportunity for a new product line. And that product line could prove to be very lucrative a year or two from now.
Acquiring Another Business
Each year there are thousands of new businesses that set up shop. Entrepreneurs are always seeking out the latest opportunities and looking for the best returns.
Some of these startups have great potential, but can’t raise enough capital on their own to fulfil that promise. Larger companies might want to go into debt when acquiring startups that have great ideas.
With the resources of a large corporation, a product can be brought to market faster. And with any innovative idea, windfall profits too.