It wasn’t that long ago that obtaining items through credit was reserved for big ticket purchases like cars or homes. Somewhere along the way, things like vacations, groceries and golf outings were thrown on credit lines, serving only to increase the national debt number. As an investor running a business, there are times when it is necessary and even intelligent to utilize credit, but only in certain situations. If you rely too heavily on credit, soon enough the debt burden will overtake your business and your profit margins on each deal will get smaller and smaller. If you have access to credit, you need to make sure you manage it wisely. Only accumulate debt when the situation calls for it.
The idea of credit should be thought of as a short term bridge to get you through times when cash on hand is diminishing. This only works for a business or a household when those cash supplies can be replenished in a short period of time. The concept of finance suggests that if you are not bringing in enough money while increasing debt, the debt will exceed your assets and your business will suffer. If you keep the bridge concept in mind, you should be able to pay off any debt accumulated in 30-45 days. If you hold the debt for much longer, you need to make that much more money to see a profit on every deal.
In a perfect world, we would only use credit for items that will appreciate in value. When running an investing business, you could use credit for materials, marketing and website development. These are items that give you some chance of getting a return on your money. Keep in mind that with most credit cards have a monthly interest charge that will significantly increase if a payments are missed. Your $100 purchase with an 18% interest rate is really costing you $118, and that is if you pay the item off in the first month. This number will only compound over time.
Even if you vow to pay off any balances when you close a deal, you may not always be able to because of unforeseen complications that will occasionally arise . The temptation is to allocate some of your funds elsewhere because you have the option of only paying a minimum balance. This will leave you with some debt. After a few deals, it will add up quickly. This is where you need to be disciplined and pay these items off as soon as any closing money is received. You can leave the card open and active if you need it, but if you keep accumulating debts you won’t have anything to show for all your hard work. Your debt should be used as a means to grow your business, not to bankroll it.
Taking on too much debt can wipe out a profitable business quickly. If you have cash, don’t be afraid to use it instead of relying on credit. You may not have as much money in the bank as you would like, but you won’t be going backwards by accumulating compounding debt.
