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Wednesday, May 17, 2017
Addicted to debt?
One of my friends likes to have a drink most evenings. A glass of wine with dinner or a pint in the pub is just a nice way to unwind with family and friends. But every year, there’s one exception. He always commits himself to Dry January, and for that month, he won’t even enter a pub.
Why does he do it? Because he likes to prove to himself that he doesn’t actually need a drink. That he can quit, cold-turkey, if he wants to. It proves he’s not an alcoholic.
Business debt is just like alcohol. Great in the right circumstances, but you must be sure that you’re not relying on it to get by.
Unfortunately, too many businesses do rely on it.
These businesses may even have forgotten why they originally extended their overdraft or started using invoice financing.
Since (unlike loans) these have no repayment schedules, they have never thought about how they were going to meet their obligations.
On the contrary. They continue to use these facilities until they simply become a fact of business life….. A given, not an exception…. Something they don’t even think about as unusual any more.
They use these facilities freely, and often for unsuitable things, for example to purchase large pieces of machinery.
But this is not right. These type of continuing facilities are only designed for emergencies and are not a long-term solution to any problem. They should not be used to fund long-term investments such as assets.
Borrowing must never be seen as something inevitable, and it must never become a habit. How healthy are your finances really, if that is the case? And what happens if your overdraft gets reduced or even removed?
If you have no firm plan in place for how you’re going to pay off new debt, you shouldn’t be getting into it.
This is extremely important because if you’re taking on debt in order to cover a financial emergency or gaps in your cash flow, it’s likely that you’re not great at managing your money in the first place (even if you’ve been brilliant at building up your business!).
This makes it more likely that an overdraft will become a permanent feature in your business, leading you down that rabbit hole of debt.
If your business has a nasty debt habit that you need help kicking, please get in touch. We’ll make sure you go “dry”, putting in place measures to pay off your debt – and ensuring that your finances are managed so well, you’ll never have to fall back on borrowing again.