There is nothing that can bring your business down quicker than excessive debt. You may be able to manage it for a while but the slightest reduction of income will cause the air to come out of the balloon. If you are like most business owners, and Americans in general, you deal with debt. If used properly debt can be a vehicle that helps your business grow. Unfortunately most investors use it on items that do nothing but increase liabilities. Managing debt requires education and discipline that can be difficult to obtain. It is easy to real estate investors fall into the debt trap. Here are a few tips to help avoid and deal with business debts.
- Understand Debt. The most basic step in dealing with debt is to try to understand it. In the simplest form you are paying interest for the access to quick capital. The most common form of debt comes from credit cards. You can also accumulate debt through home loans, auto payments and personal loans. It is important read the fine print every time you fill out an application. You need to know everything about the terms you are getting into. Not only do you need to know the interest rates and fees but any potential changes that will affect your monthly payment. It is also a good idea to take note of what happens if you miss a payment. Most credit card rates will escalate after the first missed payment. Even though personal finance can be a difficult topic to learn you need to have a basic level of knowledge.
- Good vs. Bad Debt. One of the biggest misconceptions in business is that all debt is bad. There are many successful investors who utilize leverage to grow their business. There is a big difference in good verses bad debt. Good debt is anything that is used to add value. This could be using credit to fund a direct mailing campaign. Your debt is used with the hope that it can produce additional revenue. An example of bad debt could be using credit to furnish a rental property or pay for unexpected repairs. You continue to pay for these items months after the fact. With them at least you keep your rental property afloat. It is when you truly abuse debt that you run into trouble. Using credit for personal items like weekend trips, meals and lavish expenses will leave your business on a treadmill. You will end up working twice as hard just to remain in the same spot. The money you bring in is quickly going out the door to manage your debt. Not only is this frustrating but it causes you to cut corners in other areas just to see a small profit. Once you get caught in this bad debt cycle it is difficult to pull yourself out.
- Budget/Schedule. If you truly want to pull yourself out of debt you need to do something about it. You need to acknowledge the hole you are in and tackle it head on. Start by making a list of all your monthly liabilities. Write down your current monthly payment, balance owed and payment due dates. This may seem very overwhelming but you have to start somewhere. From there make a schedule of when you are going to make the payments. Hold yourself accountable to these dates. There are going to be some months where there is not a lot of excess cash flow. You need to grit your teeth and make sacrifices during this time. Surprisingly enough one of the reasons that people spend is because they don’t have enough money. Credit allows them to spend without having the money available in the bank. Instead of making the problem worse on months when cash is tight fight the urge to spend. The more detailed you in with what you owe and how you will repay it the easier it will be to deal with.
- Monitor. It is important to monitor where your debt has been used best. Like anything else you do in business you want the greatest return on your investment. When you use credit you are really making an investment. Most people that get into debt trouble will start off strong then quickly fade after just a few months. You need to constantly look at every statement you receive and offer you get in the mail. There are instances when transferring balances from one account to another could save you hundreds of dollars every month. You may also find a monthly fee that catches your eye that could be eliminated elsewhere. Listing all your debt is a good start but you need to stay on top of it every month.
- Long Term Plan. With any plan it always helps to have a vision of your end goal. Take the time and go through all of your accounts. Write down your plan for how you are going to pay them off. This could be making an extra payment with cash flow received from a rental property or paying it off completely after you close your next big deal. Along the way remember to reward yourself with every three consecutive payments. Give yourself a small indulgence that you may have wanted for a while. Don’t pile on new debt but do something as a reward. If you do this every three months you will be motivated to stick with your plan.
As a real estate investor you can quickly pull yourself out of any financial hole you may be in. There is no cap on your income and no ceiling for what you can earn. Dealing with debt is often very frustrating but can be conquered with a plan and the discipline to stick to it.
