Chapter 4

Knowing When to Use Debt to Finance Your Business

IN THIS CHAPTER

check Checking out how debt works

check Recognizing when debt is a good option

check Exploring your lender options

check Wrangling some cash from the government

When discussing the concept of debt in today’s economy, a very serious and unfortunate misconception needs to be clarified. That is, contrary to popular belief, the term debt isn’t a four-letter word. Although the excesses of the housing debt binge have been well documented since the mortgage meltdown that began in 2007, that crash and the rash of foreclosures that followed highlighted how dangerous debt is — when used inappropriately.

If you remember one concept from this chapter, it should be this: Debt is most appropriately used when an asset is available to support the eventual repayment of the debt. Whether the asset is tangible (such as equipment used in a manufacturing process), paper based (such as a trade accounts receivable where a valid claim is present against a third party), or centered on the ability to reliably predict a positive cash-flow stream, the business ...

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