Friday Focus: Importance of Debt

Debt often holds a negative connotation. Money borrowed and therefore owed back to a financial institution or individual is always bad.

For many, running into too much debt can cause severe financial stress and eventually, if not serviced or monitored correctly, debt can lead to total financial collapse, both personally and in business.

There are instances however where debt, if used correctly, can create the ability for growth, and pave an avenue of development both personally and professionally.

Most think of debt monolithically, all debt is bad debt. This, however, is far from true, as debt does manifest itself in different ways which we’ll explore today.

There are two common forms of debt: Consumer Debt, and Debt for Investment.

The latter is derived by a circumstance where an individual or organization purchases items outside of their financial limits resulting in the need to borrow money to acquire said item. This is the most popular form of debt, and the US leads the world in this category. US consumer debt is higher than most country’s GDPs and is constantly rising. Great news for lenders, banks and credit card companies, not so good for the everyday individual.

The issue here is that most of the debt in this category is accrued in place of available disposable income. The individual in this instances purchases something that will not generate income or any financial return, which in turn causes debt to increase and multiply.

Clothing, accessories, bags, watches, cars are just some examples of consumer debt purchases.

The second category of debt are investments. These are purchases on items which will generate some form of income or return in the future.

These include, work equipment, education, land, etc.

Going into debt for an investment is powerful, because you can acquire something that can turn around and create a significant amount of income, to both pay off the borrowed capital and perpetuate the growth of yourself as an individual or your business.

As an entrepreneur, you need to learn to leverage debt in a positive way and engage in spending as an investor not as a consumer. Unfortunately, this type of spending behavior is not as prevalent, because there is a lack of instant gratification after completing a purchase. The Consumer mindset of having a nice item in front of you to use now is easier to see or sell, than a vision of one down the road.

Spending, like anything really, is a mindset. We need to be able to adjust our thinking and be able to hone in the skill of foresight that all successful entrepreneurs possess.

Best way to practice is to take time before making that purchase and ask yourself, will this purchase I’m going into debt for improve me, my performance or my business in the next 3-5 years?  

Some items that will: marketing, education, resources, equipment, personnel, fitness

The ones that won’t: golf clubs, vacation, parties, clothes etc.

You get the picture. Thinking like a business owner is key, and the most wealthy and successful individuals got that way through leveraging debt and investing long term. They didn’t get caught up in the consumer death trap that the majority of our country gets trapped in, a never-ending cycle with no escape.

Be mindful and remember consumers die, investors thrive.

To gain personalized guidance for your business on this topic and others contact us.

- Vince Calace

Founder - Venture Business Development