It is commonly believed that the more your own capital you invest to your business, the better and more secure your business would be. This is actually work in the opposite way. Having debt or loan does not mean that you have a bad business, or you lack of financial capability. Maybe you will ask so it will be great to have more and more debt. Unfortunately that also not true and not recommended. In one extreme, a business man will choose to play very safe by not having debt at all. In the other extreme, a business man will take a “very brave” step to even start a new business or expanding his existing business all with debt.
To some extent, it is good to have debt. Having a loan means that your company have a good reputation, or have a good potential in the future, so that others willing to give you loan. It can be a person, your family, a bank, or credit institution. The next question that may rise is how much debt is good debt and how much debt is bad debt. The answer depends on your business best practice. Different industries will have different risk so that it could not be same level of debt.
A well known financial ratio called Debt-to-Equity ratio will explain how much your own capital and how much debt you should have. This ratio is once more have to be observed in specific industry. The more debt you have the better your business will, where in this case you haven’t achieved your optimal debt to equity ratio. For a company which has exceeded their debt to equity ratio best practice, should lessen their debt in order to avoid the bankruptcy in the future. Credit report monitoring is important to have for company to have good control of their loan.