What is a Healthy Amount of Business Debt?
When you hear the word “debt,” you don’t usually think of it as a good thing. But as a small business owner, debt can actually be a useful tool, especially if you’re just getting started. All businesses need an initial infusion of cash to get up and running, and sometimes to expand, remodel, or invest in something new.
This is usually considered “good” debt. It’s debt that has a positive return on investment, meaning that it will pay off in the long run by putting more money in your pocket.
But too much debt can be a bad thing, leaving you with ballooning interest payments, bad relationships with your suppliers, and nothing to show for your investment.
So how much is too much? An ideal debt-to-income ratio is somewhere around 40%, but the exact number changes on an individual basis. There are some warning signs, however, that can indicate that your business is carrying too much debt:
- You have many past-due bills.
- You miss payments, or wait to pay certain bills.
- You run out of cash before the month’s end.
- You’re consistently dealing with overdraft notices.
If you find yourself in too deep, there are some steps you can take to dig yourself out.
First, prioritize your debts based on interest rates and urgency, then focus on paying them off from highest to lowest. Consider refinancing for a lower interest rate. Find ways to generate more business. Finally, avoid taking out new debt—especially bad debt.
At its simplest, “bad” debt is any debt that has a zero—or negative—return on investment and should be avoided.
As a business owner, you will probably find yourself carrying at least some debt. Bad debt can sink your business for good. But good debt, when used wisely, can help your business grow. Talk to a business banker today to learn more about what you can do to reduce some of your business debt.