Debt is something that has or can have both unfavorable and favorable consequences. For the most part, you can use it to hurt you or help you. You need loans to buy a property or invest in a business. Those debts are considered as good ones.
However, if you cannot repay your loans and if you owe more than what you can afford to pay, then that is bad debt. As entrepreneurs, how can you differentiate a good debt from bad debt? How can you efficiently pay it all off?
Well, initially, think of it as an advantage. Debt is nothing more than the amount you owe from a firm or someone to conduct an activity. And that pursuit could either get rid of your problems and make you rich. Or it could worsen your situation. For a little help, here’s an ultimate guide for entrepreneurs to successfully pay off debts. So, take a read!
Good Debt
This kind of loan happens when you are done paying it off. In other words, you are richer than you were before. For entrepreneurs, they borrow money to:
- Invest in some property
- Hire more people
- Purchase new equipment
- Enhance skillset
In each example, entrepreneurs borrow money for some kind of leverage. Meaning, the person who was borrowing plans to increase or boost business revenue by buying new tools, hiring more people, or investing in some property. The generated business profit and revenue will aid in paying off the debt. Simply speaking, if the debt will aid a person make more income, then it is considered good debt.
Bad Debt
This kind of loan happens when you have borrowed money that you cannot, for the most part, repay. Or you are financially unstable after owing money. Looking at the same examples, for entrepreneurs, they borrow money to:
- Invest in some property
- Hire more people
- Purchase new equipment
- Enhance skillset
You can consider it as a bad debt if it does not boost the productivity of the company; the new hired were not suitable for the job. Thus, the business isn’t generating enough income. Or the property has declined its value. These cases are examples of bad debt.
Keep in mind that bad debt such as credit card debt, payday loans, car loans, or anything that is intended for personal pleasure and consumption is the worst type of debt. These loans do not make money. Therefore, they cannot make you rich. According to the US Debt Statistics, 13 percent of Americans assumed to be in debt for the rest of their lives.
How To Get Out Of Bad Debt
Most people had lots of bad debt when starting off in business. For a little help, the following are the three steps that you can take to get out of bad debt and leverage good debt to make money.
Aim Your Attention On Boosting Your Business Income
Considering the revenue or income you’re making today, how long do you think would it take for you to repay your debt? One year? Five years? Well, when you ponder in these periods, it’s overwhelming.
How can you repay that money? It is impractical to think that with your current income, you can be debt-free. It’s impossible for most people. So, do not do the impossible. By that we mean, you should focus on boosting your revenue so that you can repay your debt quickly.
It’s not important what you do to increase your income. For instance, you could have another business or a job. However, you’ll need a high-revenue skill, a side job for your extra time whether you are not at your business or work. For sure, it’ll help you generate more money to repay your debt faster.
Invest In Yourself Through Good Debt
Keep in mind that loan is nothing more than an advantage. So, for example, although you are in debt, you should continually invest in yourself by taking programs and courses to enhance your skills.
Your hard-earned money is a secondary result of value creation. Thus, if you want to increase your income, you must produce more value. And to do that, you must enhance your skills.
If you cannot leverage your skills to boost your income and repay your loans, then what you are struggling in is not a debt problem. Rather, it’s a skill problem. So, if you improve your skills to generate more money, then, without a doubt, your debt will be gone.
Repay The Loan With The Most Emotional Impact First
Although you do not want to think about your debts right now, list them all. Be specific when listing your current debts. Do not just round off the numbers. Be clear. Remember that vagueness is weakness and clarity is power.
For the most part, most financial experts will tell you to repay the loan with the highest interest rate since it costs you most. Well, it sounds logical. However, people are usually emotional. Thus, we suggest you repay the loan that has the most emotional impact for you.
Takeaway
Paying off debts is a crucial step for entrepreneurs in protecting the success of their ventures. Loans depict lingering responsibilities from previous transactions. Because you’re starting a new chapter in your life, carrying these obligations into the new phase of your life is the last thing you need to do.
