There’s a lot to be said for the miracle of compound interest and how it can turn modest savings with small regular contributions into a sizable nest egg that hatches holidays, jet skis, long term financial security and more. But as with most things, there is another side to the big, cuddly compound interest bear. That’s the side with the fangs and claws that tear away at your savings and ravage your profits and yes, your lifestyle too.
If, like me, you liked but were shocked and amazed by the man versus bear fight in the recent release, “The Revenant”, you will understand what I mean. I will admit it’s fun to get all cinematic, exaggerate and characterise debt as a marauding grizzly bear but the truth is that there’s nothing fun about working hard for the banks – unless you’re actually employed them. And that’s exactly what’s happening when you don’t attack your debt as if your business life depended on it because, without exaggeration, it just might.
Alright, I mentioned how making regular deposits can work with compound interest. With the right plans in place, it is not at all unreasonable to suggest that you will double your money over a reasonable period of time. Flip that on its head and think about that “easy to apply for, even easier to get approved” business loan for $20K. In our private lives, we might shudder at the thought of a 4-figure credit card debt with its ravenous interest rates but we’re somehow okay with paying the bare minimum on a business loan with another zero or two on the end of it. Expect that debt to have doubled by the time you’ve paid it off using minimum repayments.
But what about opportunity costs?
Yes, almost forgot about high school economics. If I pay off my debts quickly, I won’t be able to afford office upgrades right away and it’ll eat into my profits for the next 12 months. You’re right. But that sounds like the introduction to a good news story that you’ll be able to tell and retell for years. You know where I am going with this. If you were to stick a fork in your $20-$40k debt within 12 months say, you will have paid your establishment fee and some other costs of doing business with your lending institution of choice. You will have also paid the required interest (up to a year’s worth) and the loaned amount.
Forget the costs and focus on the opportunity. Over time that debt would have cost you another $20-40k on top of the amount borrowed! The compound interest bear will have been feasting on your interest repayments (PROFITS!!!) for years and years denying your business the opportunity to build a war chest, build a better product or service… (how about this one?) build a better life for your loved ones.
Compound interest on debt is a dangerous beast that stalks your business, steals your profits and murders long term growth. It’s a kill or be killed game you’re playing when dealing with debt. So act quickly and FINISH HIM!!!
Why don’t you test drive an accountant that can help you get the most out of your business both now and the years to come.