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Is It Okay To Go Into Debt When Starting a Business?

The Double-Edged Sword of Business Debt

Launching a new venture takes capital – and, for most entrepreneurs: loans, or taking on debt. But, is piling on debt advisable? The answer, isn’t simple: debt can provide the funds needed to get a business off the ground – yet, comes with substantial risk, if not managed diligently.

Why Debt May Be Necessary

Business loans provide start-up capital for inventory, equipment, marketing, and covering operating expenses until profitability. Cash flow is a perpetual challenge for new businesses: though sales may eventually ramp up, bills need paying immediately. So, some level of debt is practically inevitable.

The Dangers of Overextending

That said, undertaking excessive debt from the outset can quickly spiral into insolvency. If sales disappoint, or unexpected costs arise – the debt burden becomes unsustainable. Your personal assets could be at risk, if you’ve personally guaranteed loans. Bankruptcy – along with its substantial credit ramifications – may loom.

Mitigating Debt Risks

So, what’s the right approach? Develop a conservative, defensive business plan that:

– Minimizes initial start-up costs through bootstrapping, lean operations, etc.
– Avoids excessive fixed costs/overhead at the outset
– Includes a thorough sensitivity analysis on revenues and costs
– Has a contingency plan for slower-than-expected sales or unexpected costs
– Leverages lower-risk sources of capital first: personal savings, friends/family funding, etc.
– Only takes on debt with a concrete, conservative plan to service it

By limiting debt to manageable levels – and diligently controlling costs – start-up debt can be a necessary catalyst for growth, rather than an albatross.

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The Bottom Line

Some debt may unfortunately be unavoidable when starting a business. But, excessive debt endangers the entire venture. Cautiously manage debt levels against conservative revenue projections – and be prepared to course-correct rapidly to avoid compounding debt issues. Going into too much “bad” debt from day one is a surefire way to sink a new business before it even gets off the ground.

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