To provide for the expenses of our business, we have to be financially capable. Money is what covers our business’ operating expenses, working capital, starting capital, and other aspects of a business. As these expenses are met, our business becomes financially stable.
Naturally, the finances that we use to cover such costs come from our jobs, what we receive from various financial aid, and/or from the income that we get from our businesses. However, at times, we cannot provide for such expenses that we resort to borrowing money.
To borrow is to incur debt. The amount of money that we borrow is to be paid with the added interest that is agreed upon with the lender over time. Here are various reasons why we borrow money.
It may be because it is for emergency expenses, fluctuations in the cash flow, or setbacks in management. Whichever it may be, such debts create ripples that affect the economy of a country. To further elaborate, below is the USA’s Debt statistics, its causes, and the impacts on the economy.
$600 billion are borrowed by small business owners.
Business owners who look for loans in the US have declined. However, according to a survey made by the Small Business Administration in 2017, the decreased number of borrowers still borrow $600 billion each year. The number doesn’t include other types of financing, such as buyouts or equity investments.
One of the reasons for the high-incurred debt of business owners is that such owners want to expand their businesses. They want to level up their business to be on par with others, not saving their business from bankruptcy.
Such a number affects the economy by raising the economic growth of the US. This can be credited to the financial growth of businesses. When businesses are booming, it means that such businesses pay higher taxes and hires more employees.
$17.5 billion are borrowed from alternative funding.
The standard type of loan that Americans turn to when they are still starting up their business is alternative funding. In 2017, a total of 17.5 billion dollars was borrowed by Americans to pay for business-related expenses. Among the expenses, the starting capital was the most priority.
Half of the alternative funding was personal loans, as it comes with low-interest rates and can be seen as potential starting capital when building a business. Other popular sources include help from friends and family and short-term financing from lenders.
What causes borrowers to turn to alternative funding is that traditional financing may not work for them. It may be because they have low credit scores, which means they don’t qualify for bank and credit union loans, or it may be because they go for lower interest rates.
Whichever it may be, alternative funding affects the economy by decreasing its GDP or gross domestic product of the US as such alternative loans cannot be officially recorded.
48% of small businesses have obtained their financial needs
Roughly half of the small business owners have their financial needs met. Such needs include the hiring of workers if you’re engaged in a service business. If you are in a manufacturing business, financial needs may be needed to cover the expenses of raw materials. For merchandising business, buying the products directly from the companies for retail is also covered by such needs. When lacking finances, a business might lead to failure, then bankruptcy.
That said, the causes of which may root from the unavailability of financial sources, market fluctuations, and disruption of market flow. In turn, this also poses effects on the economy. It might bring a decrease in the economic growth of the US.
Takeaway
Debt affects the economy in a lot of ways, especially on the economic growth of the country. The debt statistics have shown the rise and fall of the economy of the US and the causes of such debts. So, the next time you think of loaning and gaining debt for your business, think of how it affects the overall economy.