Financial Mistake #11 - Good and Bad Debt | Nitro Marketing Blog

This is the 11th Mistake in the "13 Financial Blunders Newly Successful Internet Entrepreneurs Almost ALWAYS Make" series.

11) Good and Bad Debt

I don't think I need to talk too much about bad debt. I've been there in my younger years when I was getting started in business. I not only financed my business but also my rent, food, furniture and just about everything with debt when I was getting started in the 1990's. That's because I took the "Head First" approach to going full-time in business.

If you are in a position where you need to get out of debt. I highly recommend spending a little time to become educated on how the most effective way to get out of debt. My friend Leo Quinn does an excellent job at his site on debt reduction.

Today let's talk about GOOD debt. I bet that's a term you never thought about!

Specifically debt for your business.

If you want to grow your business to any decent size (in excess of a one or two million dollars a year) then you will experience hiccups, growth struggles and high costs before income periods.

In essence having access to short term debt can be the difference between many sleepless nights or even failure and pain free growth.

Let's look at a couple examples.

Your merchant account company goes psycho (which in their world is considered standard every day practice) and freezes your account because (fill in any stupid reason you can think of) and that $50,000 in sales is going to take 6 months before you receive the cash in your bank account.

However the expenses for those sales (product costs, affiliate commissions, PPC fees, etc) are not put on hold for 6 months.

Enter cash disaster!

However if you have access to business debt you can survive this potential disaster with little if any worries.

Side Note: Some people new to the game may think I'm exaggerating the merchant account story, I'm not. Us savvy veterans have at least one if not multiple stories like that in our war chest. That's why it is VERY smart to find a good solution from day one. I highly recommend Paul at www.epaymentguru.com

The company he represents is internet business friendly and understands our type of business. And you have somebody (Paul) who is looking out for your best interest and teaches you how to be a good merchant.

That was a bad case scenario, let's look at a positive one.

You decide to add a physical course to your line up of products, you use the Resource Directory in our Nitro Blueprint System to find the best companies to produce and fulfill them for you. Then reality sets in. To create 1000 units and get a significantly better price is going to cost $30,000 upfront!

That's a big chunk of money to put down knowing it will be anywhere from 2 to 6 weeks before you start turning it into sales.

However if your business has a good credit record you can negotiate net 30 terms with your vendor, have the products produced with no cash down, start selling them and pay the bill out of your sales.

Yes, just like you have a personal credit record, your business (if it is a corporate entity such as an LLC or an INC) has a business credit record. That is if you do what I am about to share with you.

The Good Business Debt Solution.

Here is what we have learned over the years.

First get a credit card for your business and charge your expenses to this card. Then pay off the balance each month. Mine is through American Airlines Business Platinum Card program and earns me miles. I also know a lot of people who have an American Express business card.

This starts developing your credit history.

Second go to the bank your checking account is with and set up a line of credit.

This is is credit that is available to you in "like cash" form. You can move cash into your checking account and build up a balance on your line of credit and usually only have to pay the monthly interest.

There will come one or more times in your business life, especially if you are a growing company, where having access to temporary cash will be a life saver.

And like the saying goes its much easier to get it (the line of credit) when you don't need it than when you are neck high in a disaster.

Also, make a point of having 3 solid credit references from other companies.

When you are trying to get payment terms with a new company or vendor they will check out your credit references to see what terms they have extended you. So your CD production company provides you net 30 terms up to $10,000. Or a company you advertise with provides you net 15 terms up to $30,000.

You can even go one step further and set up a Dunn & Bradstreet account and number. They are like the "Experian" of the business world and maintain your business credit history. Anytime you apply for business credit they will run your D&B report.

By providing your D&B number with your application you show you know the game you are playing and not some business newbie.

Another side note, one of D&B's main business is collecting money. If a business owes you money and isn't paying up, you can have the big boys go after them and they are very effective at collecting.

Next up in this series, Mistake #12, is a habit you should have but mostly likely do not (it took me many years to finally get this one down).