Course: Why businesses borrow money
What can happen if you take on bad debt?
Sometimes even the thoughtfully planned borrowing can go awry. Taking on bad debt isn’t the end of the world, but it can have consequences. The following are four ways that bad debt could affect your business.
Borrowing too much
Borrowing too much
Though borrowing can help you reach your goals, borrowing too much can limit productivity if your payments take away from the money needed to run your business.
Borrowing with unfavorable rates and terms
Borrowing with unfavorable rates and terms
Even if you can’t get a good interest rate, it could still be worth borrowing, but be aware of potential consequences. If you’re unable to pay back your loan with interest, it could affect your credit score and endanger the financial health of your business.
Borrowing to maintain status quo
Borrowing to maintain status quo
It’s best to borrow with a goal in mind and plan to get there. If you’re borrowing to maintain status quo, it can increase your expenses in the form of loan payments while revenue remains the same, ultimately lowering your profit.
Borrowing to cover other loans
Borrowing to cover other loans
While it’s possible to strategically pay off loans with other loans, this tactic should be approached with caution. If it goes poorly, it could result in a spiral of paying off multiple debts.