How would you feel if you found out that a friend was running his business on debt?
Filipinos often see ‘utang’ or debt in a negative light. It makes business owners anxious. Many try to avoid borrowing money because of the problems that are perceived to come with it. It is not surprising that debt is often regarded as a sign of bad financial management, especially when one has acquired too much debt that it has already become a burden to repay.
There is good debt and bad debt, however. Borrowing the right amount of money at the right time for the right reasons can be a powerful instrument to finance business growth. It is crucial for entrepreneurs to understand how debt can be used to generate more money and profits.
What makes a good debt? The answer will mostly depend on what the money will be used for. Smart entrepreneurs only take on debt when the use of funds will generate more revenue. This can mean using the borrowed money as additional capital to take on bigger projects, buy raw materials to fulfill large purchase orders or buy equipment that will make production more efficient. For example, it would make sense for a bakery owner to use borrowed money to buy a bigger oven when demand is high because it allows for more efficient production, thus more revenue earned.
Bad debt is spending borrowed money on something unproductive, like buying expensive furniture for the office of your online shop. Another example is acquiring new debt to repay old debt. Unnecessary expenses like these only make debt pile up, ruining your credit reputation, which is a serious consequence most business owners take for granted. Every time you miss a loan repayment, the information gets recorded and counts as a red flag that erodes your credit score, making it hard for you to get your next loan.
Many do not realize that financial institutions will only lend money to businesses with good credit reputations, which is why the best businesses have access to funds whenever they need it. If anything, getting financing approved by banks and lending companies is actually a good sign that your business is doing well. Acquiring debt for the right reasons makes it easy to repay the principal loan plus interest with extra income to spare. It allows you to take on big business opportunities that you would otherwise miss without leverage. This is key to making your customers happy and growing your business while also maintaining a good credit score.
The secret in making any business grow is learning how to manage your finances well. Everyone needs money to make more money. Financial institutions would be happy to help to responsible small business owners needing extra funding to boost revenue. Understanding the good side of small business debt and using it to your advantage, instead of being afraid of it, might just be what your business needs to unlock its full potential.
Patricia Lynn Cañaveral is a recent graduate of the University of the Philippines Diliman and is now a business analyst in First Circle, a fintech company on a mission to expand business opportunities in the Philippines by providing trade credit to small businesses. For inquiries on how First Circle can help your business, visit www.firstcircle.ph or call 580-3200.