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Loans and Your Business: Don’t Bite Off More Than You can Chew.

by Dan on November 10, 2011

You’ve probably heard the recent news of Italy’s debt cost hitting a record high of 7%. This means that Italy has to spend a total of 7% of its GDP (That’s the value of all goods and services produced within a country, which can be thought of as the income of a country) just to keep up with the interest payments on its debt. This is incredibly hard to do when you have an entire country to keep on top of. You’d think that someone, somewhere would have put the brakes on debt acquisition by saying: ‘hold ona a momenta, we besta holda our horses!’ (My best attempt at writing in an Italian accent).

But the truth is that without debt many countries can’t finance expansion, and without expansion they can’t grow – an axiomatic truth if there ever was one. But when expansion doesn’t go quite as planned, the country is left with a debt that it can’t repay. Poor governance and even poorer financial planning cause economies to crumble, but the lessons learned from such poor conduct don’t only apply to countries. Individuals should avoid the same mistakes, though admittedly on a smaller scale.

Small businesses and work-from-homers (or WOFROHS) are just as likely to make the same mistakes that countries make when it comes to getting in debt. They invest unwisely in unnecessary luxuries, rather than in things that are conducive to growth. They also fail to properly account for spend of the loan, and don’t think about the consequences of taking out a loan thoroughly before doing so.  People often fail to then properly take control of spiralling debt, lacking the discipline to resist overspending.

Some even take out a loan to pay off a loan, something which is never, ever a good idea. All it does is compound the problem and increase interest. What you should do, if you find yourself in debt, is impose strict restrictions on your spend, cut your salary and get yourself out of the debt.

This is, of course, easier said than done. But then getting out of debt is never easy, and it only gets harder the deeper you get. Working for yourself can be as easy as you make it, so don’t make it hard for yourself and keep on top of your debt.

Key to keeping on top of your debt is knowing when to take out a loan. This is because loans can be incredibly useful if you’re dead certain that expansion is going to bring high profits to your business. Even if it’s not dead certain, it might still be worth the risk, but that’s for you to decide upon a thorough examination of all the relevant facts. These relevant facts include, but are not limited to:

1) Ability to pay off loan if plan doesn’t work

2) Likelihood of expansion working

3) The costs of expansion

4) The projected profits from expansion

5) Current profits

6) Projected profits without expansion.

If you analyse these facts before you take out the loan, you may find out that your projected profits without the loan may be higher than with the loan. You may also find that the interest on the loan means that you only make a marginal profit from expansion. If that’s the case, it is also worth thinking long-term, to a time when you’ve paid off the loan and you no longer have to pay interest.

In conclusion, a loan can either be a great boost to your business or the concrete around your feet as you’re trying to swim. It’s up to you to determine whether it’s an aid or a detriment!

Hope this article helps.  Once again, if you have any debt stories or helpful advice for others please sign up to Little Earner and leave comments below!

Sincerely,

Dan Little

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