Episode 32: The Good, Bad, and Ugly of Business Debt

  📍 Welcome to CreativeMind Smart Money, the podcast where creativity and business smarts collide. I’m your host, Samantha Eck, bookkeeper, business coach, and your go to guide for building the creative business of your dreams. Whether it’s mastering your money, streamlining your systems, or growing your business, I’m here to share insights that empower you to thrive.

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You’re listening to the Creative Minds Smart Money Podcast. And today’s episode is about the good, the bad and the ugly . Debt can be good in many different ways, but it can also be bad. It’s that frenemy that we all have that can either help us slay our goals or totally ghost our bank account. So how do we make sure that debt works for you and not against you?

And today we’re really going to get into the do’s and don’ts of debt. For creative entrepreneurs, debt can actually be a really great boost to your business or it can be a total buzzkill, whether it’s funding your next big idea or digging you out of a financial hole, Understanding debt is really just a big non negotiable part of your business so that you can understand whether or not it’s something you should be actively involved in.

One of the stories that I want to share with you is about one of my clients who is a screen printer. a very big business. They’re very successful, but they can also can’t afford to drop 150, 000 on a brand new piece of equipment. So they were actually looking for a new print press and they needed it.

And it’s 150, 000 for this piece of equipment. They knew that it would help their business overall, but the impact that it would make to just spend this outright would definitely harm their business in the long run. So after reviewing the numbers and analyzing to see if they could afford the monthly payments, we determined that the best thing for them to do was to in fact have some sort of financing in order for them to get the equipment.

This is the difference between good debt and bad debt. Let’s talk about the really key differences. Good debt is investments in business growth. Bad debt is high interest liabilities. So when we think of what good debt is, good debt is things that further our business and don’t harm our business. So for example, pieces of equipment, maybe a loan that’s going to get you into a course that you’ll be able to pay back.

Maybe even a loan that will kind of like give you that extra boost that you need. The importance of understanding the difference between good and bad debt is very important. Bad debt is things like merchant cash advances, really high interest credit cards, loans that are going to be causing you high interest things like that.

You have to be very careful when you think about what good debt is and what bad debt is. Now we want to talk about how we spot debt traps. There are many different dangers of debt including high interest rates, over borrowing, and taking on debt to cover bad spending habits. When you’re taking on debt, you really want to think and understand if you’re going to be able to pay that back.

I’m going to give you just a hypothetical scenario. Let’s say that you are a photographer and you need a new camera. Your old camera just isn’t good enough anymore. It’s not making the cuts that you need. It’s just not getting the good photos that you need to really help your business and really help your clients.

So how do you, you know, Make it better. You know that you need to invest in equipment. Now you can’t afford to outright pay for this new camera, this 2, 000 new camera. It’s been a very tight cashflow month and you know you need the camera, but that 2, 000 just isn’t a possibility right now. So you look at financing.

The first thing you look at is a business loan. Because you don’t have a lot of business credit, the bank comes back and tells you, I’m sorry, we’re not able to give you a business loan. So you look at some high interest business loan. Providers, they’re charging 40 50 percent interest for a business loan.

You realize how dangerous that is? So you say okay, you know what I’m not going to go with a business loan. You also have a business credit card it has a balance already, but It does have room for you to be able to afford your camera. You look at this and you say, okay, well, it’s only 26 percent interest.

So I’m going to go ahead and purchase my new camera on my credit card. The next month business has not picked up at all. And you’re still struggling to make the minimum payment on your credit card. So you have a new camera and you have new equipment. But you don’t have enough money to pay off that high interest debt.

This is what we call a debt trap. This business owner looked at their business and despite being able to see that they might be having another slow month, decided that it would be better to purchase a new piece of equipment. And this is the very key importance of knowing your numbers and knowing if you’re going to be able to afford things, spotting trends, things like that.

So this is where, it’s one of those very important moments where you really want to understand your business overall. Now that’s a hypothetical scenario, obviously business owners don’t always do that, but that’s in that event where someone was thinking of that. There are ways you can use debt as a tool.

Especially really practical ways. Pulling back into that first example I gave you where my client needed to purchase that equipment, they financed that necessary equipment for their business and they were still able to afford those minimum payments. One of the other practical ways is to cover gaps in cash flow during slow seasons, but I want to really advise against this.

If you’re absolutely positive you’re going to pick up in a couple months, this can be beneficial. But I also want to mention that we’ve been preaching and Just telling you in a couple of these past episodes that you should be building up an emergency fund at least three months in your business bank account so that in the event that you have these slow periods you’re covering those gaps yourself.

There is no reason that you should need to take out a loan because your business is already covered through raw cash flow. If you’re really really struggling and you’re like I have a new course coming out I know I’m gonna make this money back you can use it to leverage debt but I want you to do it really smartly.

I want you to look at that and say okay. This course is 50 a course, can I afford to take on a 5, 000 loan? Because if the answer is no, then you shouldn’t do it. The third thing is investing in a course or program that will directly increase your income. Now I know a lot of people don’t think of this as debt, but debt also includes those things like Klarna payments, Affirm payments.

Any sort of those split in four payments, that is still considered debt because if you default on those, you’re still paying a certain amount of interest and a fee. So you do want to really think of those and consider them as debt. If you’re investing in a course or a program that will directly increase your income and you can split that into five payments of 1, 000 each and you know you can afford 1, 000 every month.

Then absolutely that’s something that you can leverage that debt smartly because now yes you do owe You know that extra four thousand dollars to that business owner But you know that you’re going to be able to afford it every month you always want to compare that debt to investing in yourself in your business But only if there’s a really clear payoff because there if there isn’t a payoff then it’s really not worth Using that debt now, there’s three questions I want you to ask yourself to determine if debt is truly right for you and your business You The first one is, will this debt directly help grow my business?

Pulling back to that example that I gave you the first time, where we were talking about their financing and the equipment, that business owner was only thinking of how can they help their customers faster and how can they help more customers.

Obviously purchasing that new printing press helped to grow their business and help them to Process clients faster and it really did help their business So if it does directly help your business grow, it’s a really good investment Can you realistically pay it back without stress? If you are looking at your business and you’re saying oh my gosh, I don’t think I can pay this back You know at this amount every month then it’s not a good business move

especially for those merchant cash advances, if you’re looking at your business and you’re saying, okay, 15 percent of my revenue is what Stripe is going to take if I take out this merchant cash advance, you want to look at that and say, can I afford for them to take 15%? Is 15 realistic for me and I will I do want to remind you that merchant cash advances are this huge cycle of just continuous debt A lot of the times what I see with my clients who take out square loans is because they’ve taken out the square loan They just can’t get out of this cycle because square will offer them another loan close to when their other loan ends Even though they still owe five thousand dollars and that five thousand dollars should just get tacked on top of their new loan So merchant cash advances are very very dangerous

And then, of course, the third thing is do I fully understand the terms and conditions of this debt? Is there a late fee? Is there a fee for not paying at all during a month? Is there a fee if you want to extend that payment? Do you fully understand the terms and conditions and how it can impact your business?

Were you to default on a payment? Were you to decide to not pay anymore? Do you fully understand that? If you’ve asked yourself those three questions and you figured out the answer to if you want to take debt, That’s great. But I also want to talk about some alternatives to taking on debt perhaps you’re someone who’s vehemently Advocated against debt like myself and you’re like, how do I not take on debt for my business?

So there’s a couple of different ways and you can explore some creative funding options One of them is bartering services. So you could barter services with another business owner. For example, if I needed brand photography and the photographer needed. Bookkeeping, we could barter some sort of deal where I’m like, I will do your bookkeeping for a couple of months free in exchange for your photography services, something like that.

Now I want you to keep in mind that that all needs to be tracked in the books. If you’re offering free bookkeeping services, you need to record what the price of the book is. Photoshoot the brand photoshoot would have been Because that needs to be recorded as an expense And then you also need to record your discount that you’re giving technically for your services that all needs to be recorded in your books and it is very important.

It’s not something you want to miss or skip over. And it can be something that I want to talk about in the future. If you guys are interested in learning about the importance of recording those bartering services. Another option is pre sales or crowdfunding. So if you want to sell a course before it releases so that you can have that money ready for launch, maybe you want to post it on like something similar to Kickstarter to get your business crowdfunded.

That’d be something great. And then of course, My biggest one that is an alternative to taking debt is building a buffer fund for unexpected expenses. This can be such a great opportunity for you because let’s say you were that photographer that needed that 2, 000 camera and you had that 2, 000 saved up in your buffer.

You are of course able to dip into your buffer and then just rebuild it. in the coming months. But you really want to think about how do I build that fund so that I can keep myself from going under. So those are three kind of alternative ways for you to avoid taking on debt, especially if you’re a business owner who doesn’t want to deal with debt.

📍 So what did we learn in this episode? Knowing the difference between good and bad debt is so important and you really want to evaluate what’s already on your plate to understand if you can take on any form of debt. So knowing your numbers is very key. Before borrowing, map out how you’ll pay it back and ensure that the return on investment is going to make sense for you and your business.

And then if that doesn’t make sense for you and your business, you want to research those alternative funding options to avoid that unnecessary debt that could potentially harm your business overall. Debt doesn’t have to be a villain. It’s a tool. It can be a tool, especially in the form of equipment purchases.

The secret is knowing when to wield it and when to walk away. So whether you’re scaling up or staying lean, remember that your financial decisions today shape the business that you’re going to have tomorrow. So be intentional when you’re thinking about taking on debt. If you’ve enjoyed this episode, don’t forget to subscribe and leave a review to help creatives like you navigate the numbers game.

And check out the show notes for more resources on mastering your finances. As always, keep being creative. Farewell, fellow travelers.