Good vs. bad debt – how to use the former to grow your small business

By Alana Downer

Most small business owners have negative connotations with the word “debt,” mostly because it’s something that has to be repaid. Debt is a promise, and there are often huge consequences when you cannot keep that promise. Yes, most of the time, debt is definitely a harmful thing, especially when repaying it in full proves to be difficult and requires you to go into unimaginable lengths.

However, not all debt is bad. In fact, if used wisely and carefully, some debt can be a positive thing, and can even become a foolproof way to grow your business into unimaginable success. It’s all about knowing when and how to use debt – and what the difference between god and bad debt is.

Bad debt: Over-marketing instead of changing

You just opened up, and you’re definitely not meeting your financial goals. Sales are lackluster, and the customers aren’t banging down your door. It’s a scary feeling. Many business owners decide that they need to invest more money into marketing and advertising to draw in the right crowd. Borrowing money to do that might not be the wisest use of your resources. Instead, be a little more imaginative.

Good debt: Revolutionizing something

If you aren’t competing as well as you believed you’d be (and are therefore not seeing a satisfactory number of customers), the problem might be with your offering. If you’re selling the same product or service everyone else is selling, people are more likely to stick with what they have grown accustomed to instead of switching. This is because they see no clear benefit to switching.

Borrow money to innovate and release something better. Consider how you could meet the customers’ needs much better than your competitor can, and come up with a plan. Figure out how much money you’ll need to borrow to make that a reality. It’s an investment in revolution.

Bad debt: Buying your startup space

A lot of people take comfort in knowing that they own something outright. Buying a house with a couple extra bedrooms is probably a good idea, but families are much different from businesses. The house you live in may welcome a child, or two, or three, or even four. A thriving business might add ten, or twenty, or a hundred and fifty employees. Think about fitting them into your startup space.

Growth is hard when you’re paying a mortgage or are locked into a long-term lease in a place that won’t accommodate that growth – even if your monthly payments are lower when you do so. Breaking that lease can cost more than you expect, and selling that space may not be so easy. Keeping payments low or reducing monthly expenses seems promising to startups, but it’s ultimately a better idea to make small cuts while raising side capital. You’ll have more flexibility with your budget.

Good debt: Raising extra capital on the side

Stretching your budget helps, but making more money is better. Offset costs or plan for expansion by investing in your future. People raise extra capital by investing in other businesses, investing in new technologies, and residential real estate investing. Wise investments are debts that become surpluses with minimal work and minimal time. You can turn around and stick those returns right into your business.

Bad debt: Taking money from a casual investor

Taking money from an investor to help start or grow your business is, in its essence, a good idea. Sometimes, it’s hard to find the perfect investor. This leads business owners to turn to casual investors – they’re willing, they’re probably new to investing, and they’re excited to make money. Hopefully, you can pay them back. If things aren’t working out the way you planned, they’re going to be angry. If only there were another way. Wait! There is, and it’s good debt!

Good debt: Taking money from a mentor

Taking money from a seasoned investor who knows your industry is a good debt. This investor will give you the money, but they’re also likely to micromanage you just a little bit. Their wisdom and guidance comes from years of industry research and experience. Embrace that micromanagement. This investor really wants his or her money back, and they’ll be willing to guide you along the path of getting it. You’re more likely to successfully repay the loan and make some money in the process if your lender is more knowledgeable than you are.

Good debt makes a better business

Before you make a hasty move, consider the risks and rewards. True, you can try growing your business using good and bad debt, and who knows – you might even succeed. However, if you research your options, trust the right people, and go into debt carefully – the chance of your business exploding with growth will be much higher. Just as the chance of paying off your debt quickly and easily will be. Don’t acquire bad debt when there’s plenty of good debt that will help you find success.


Alana Downer is an experienced investor, and a long-term financial blogger who enjoys sharing her money knowledge with individual readers as well as businesses. She is also an avid fan of creating passive income, and doesn’t miss any opportunity to learn about new and unique ways of earning additional money.

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