In economics, personal debt, often called consumer debt, is a loan taken for consumption, not an investment, in the business. It is often used to purchase consumable goods not appreciated in business. When a financier or a financial body gives a specific amount of money to the borrower, this money is called debt.
Debt is created by the borrower, who must return the money lent to the financier. Debt is also called a loan. There can be different types of loans. The person or entrepreneur who owes the debt is a debtor, and to whom this loan/debt is owed is a creditor or lender. Debt can be issued either to an individual borrower or a business.
Personal debt is taken by the individual entrepreneur, not by the business and corporation. Entrepreneurs use debt to fund massive purchases they cannot afford under normal conditions. A debt arrangement means that the borrower is given money under the condition that they will pay back the money at later dates, and, most of the time, this is paid back with interest.
7 Rules for Going into Personal Debt as an Entrepreneur
Whatever the business is, money is required as an investment to get a company started. Even if the business is a one-person business, in the beginning, it still needs money to register the name, logo, tools, workspace, and a computer for running the business. Even the smallest business requires money for a promising start-up. Suppose the entrepreneur does not have enough savings, or the business operating expenses may grow beyond the revenue. In that case, taking a loan to invest in the business is obligatory.
There are many options to attract potential investors, but the banks may not give the loans if there is no evident revenue system in the business. In that case, entrepreneurs have the option of going into personal debt.
Here are some important rules to be followed by entrepreneurs going into personal debt.
- Personal debt must not be taken as the first choice. First, consider all other options available at that time to invest money in the business rather than taking a personal loan as the first choice. Review the business plan and bookkeeping. Clearing these issues will make the business plan more appealing to potential investors, further decreasing the chance of going into personal debt as an option for the entrepreneur.
- If the business is of small size, then go for loans offered by the government, which are provided with the slightest interest rates.
- Get rid of any current debt first. Remove previous debt as much as possible before going into a business needing more loans.
- Have a clear-cut idea of what personal debt is. Even though you are using this loan for your new business, going into personal debt is a personal loan. You have to pay it back yourself. Though you might be investing the lent money in the business, paying back this loan with interest is your liability. Many businesses have not generated remarkable profits for years. If the business is new and not already successful, then the business could go under and must be kept in mind.
- Get personal loans at the best interest rates. Try searching for better interest rates, which are more feasible for an entrepreneur to pay back the loan than take on much higher interest rates.
- CrowdFunding Option: Large masses of people are asked to invest small sums, and huge capital investment is created.
- Always have a backup plan when going into personal debt. In case a business fails or does not yield enough profit to pay back the loans with interest, the entrepreneur is personally accountable for the debt taken, no matter what.
Conclusion
Personal debt is a good option for entrepreneurs for investment in a business plan, but always consider all other options. Always have a backup plan if the business fails, as the entrepreneur will be personally accountable for paying back this loan.
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