I often get this question from my coaching clients who are starting a new business. Usually, they are referring to revolving versus non-revolving debt. Revolving debt is the kind of debt that is associated with lines of credit issued to credit card holders. Non-revolving debt is associated with mortgages, vehicle and student loans, and other debt that involves fixed payment schedules.
I believe in entrepreneurship because I believe that this is one of the best ways to achieve financial independence and freedom. However, one of the first steps you should take toward financial freedom is to eliminate or decrease interest-bearing revolving debt. And if at all possible, eliminate or decrease non-revolving debt – though this may be unrealistic for the average entrepreneur.
Reducing Revolving Debt
Your goal should be to eliminate revolving debt that you carry from month-by-month. This type of debt generates interest and fees that add more debt to your debt. It’s okay to maintain revolving debt as long as you pay it off in full by the due date each month. It is also best to maintain a 30% or lower credit utilization rate. In which case you don’t incur any interest and you are able to build your credit more efficiently.
However, anything beyond this will be a financial burden on you as you try to build your business. This is why I absolutely recommend starting a business free of revolving debt. You should also maintain a manageable amount of non-revolving debt. Doing so will take a great deal of stress off of you as you start your new business venture. This way you can concentrate on building your business without the pressure to perform just to pay off debt.
Obtaining START-UP CAPITAL
I recommend establishing business credit from the start of your business venture. However, I also recommend limiting the amount of money borrowed for business start-ups. If you need to borrow money for your business, be sure that you can pay off your debt in a timely manner. Only borrow what you can comfortably pay back each month and be strategic when making business purchases.
This is my general advice before starting any new venture that involves finances. Whether you are buying a new house or vehicle or tying the knot, it is best to start with as clean a slate as possible. This way, when unexpected expenses related to your new purchase or venture arise, you won’t be caught completely off guard. So if at all possible, you should clear all interest-bearing revolving debt and as much non-revolving debt before starting your business.