Hi! I’m David Sutantyo, director of Twelve Grains Capital, and we deal with debt every day.
If you, like many others, think that debt is evil and try to avoid it at all cost, it’s completely normal. There’s a lot of misconception around debt, and generally, people are too busy to read up about it.
So here are what you need to know in bullet points (which we’ll elaborate more below):
- There are good debts and there are bad debts
- Lenders are the kind of person who’d lend you an umbrella when it’s sunny and take it away when it’s raining
- Debt is a double-edged sword. Learn how to use it
There are good debts and there are bad debts
Good debts are those that make you money. How, you ask? If you take out an investment loan to purchase an investment property, and said property is returning you a rental income while you’re paying down your debt and the value of your property grows: that’s a good debt. If you take out a business loan to help you purchase more stock and fulfil more orders that otherwise you won’t be able to due to limited working capital OR you don’t want to tap into your reserve, and said stock turns into revenue: that’s a good debt.
Bad debts are those that DON’T make you money. For an example, if you take out a loan to purchase a place to live in, and you’re not getting any rental income on it, arguably: that’s a bad debt, but a necessary one. So, try and pay it off as soon as you can. If you take out a loan to buy a shiny new car, and that car doesn’t help you earn an income: that’s a bad debt.
Lenders are the kind of person who’d lend you an umbrella when it’s sunny and take it away when it’s raining
Be proactive, not reactive. When your business is already in cash-flow trouble; you’re behind on paying your creditors, you’re struggling to pay your employees, rent, etc, lenders will see that as a sign of poor money management and will be reluctant to lend you more, if any.
Sit down with your accountant, financial planner or broker to review your business when you’re performing well, to see how taking out loans that you can afford could help you build better business and help build credibility with lenders should you need a big favour in the future.
Debt is a double-edged sword. Learn how to use it.
Debt shouldn’t be scary, you should learn how to use it properly. We’re a big advocate for “responsible borrowing” and you should only take on debt if you could afford it — you shouldn’t spend more than 30% of what you make monthly just to repay debts.
Structured properly and strategically, debt could help you leverage your business and take it to a level you never knew you could achieve before. It’s best to speak with your financial advisor and/or broker to see if this is the right option for you, and to weigh the pros and cons.
We have seen cases where clients are trying to take on more debt because they’re not able to keep up with their current debt, which is extremely concerning. In this instance, you should probably speak with your current creditors to work out a more affordable payment term or to a debt counsellor to help bring your debt level down to a more manageable level.