I want to answer a good question about debt I was asked this week…
“When you have debt (on a credit card or line of credit) and own a business, how do you know how much to reinvest in your business versus when to pay off your debt?”
There’s an easy way to look at this. It’s a two step process. First, ask yourself what is the interest rate on your debt? Let’s say it’s 13%. If you pay off the debt, it’s the same as if you earned 13%!
So, then the second part is, can you earn better than 13% by reinvesting in your business? To answer that, you need to be specific what exactly you would be paying for in your business. Would it be for more marketing? For new product creation? For secretarial support?
If it can be directly tied to creating revenue and the revenue is more than 13%, then that’s what you should do. Revenue generating activities would be to get a new client or to sell a product or service. If it’s not going to result in 13% more revenue, then it’s probably best to pay off your debt.
If you’re not sure, you can always pay half and half! Use half to pay off debt and half to reinvest in your business! But begin to realize there’s a cost to money and your interest charge is the yardstick against which you measure!
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