Dirty WordIn an era marked by credit crisis, many small businesses are hesitant to assume new debt. Business owners simply don’t feel sufficiently confident in the economy to apply for lines of credit. On the one hand, they’re right to be cautious—small business loans are notoriously difficult to secure, and interest rates can be prohibitively high for small companies with weak or mediocre credit histories.

But this cautiousness comes at a cost: without lines of credit, businesses often stagnate, as they lack the capital necessary for expansion. And in an economy that’s almost begging for small businesses to foster job creation, that’s not a good sign.

The solution? Borrow, but borrow smart. There’s a difference between good debt and bad debt, and making the right credit decisions can be the key to the success of your business.

Good debt is accrued when you use credit to purchase a good or service that will either increase your business’ net worth, or will help your business to generate revenue. It follows that bad debt involves the use of credit to pay for items that your business can’t afford. Sounds simple, right?

The line between good and bad debt, however, can be tricky to navigate. To make sure your business’ debt is always the good kind, here are a few credit rules to live by:

Bootstrap your Business.

When you’re first starting a company, it’s important to make the growth and development of your business the focus of your expenditures. If purchasing equipment for your company has a strong chance of generating business revenue, then it makes sense to buy the equipment using credit, as you’ll be likely to pay off the debt quickly. However, buying certain things, like office decorations or company stationary, that don’t directly contribute to the financial success of your business aren’t worth the debt. For the nonessentials, it’s best to wait until you can afford them on your own instead of paying with credit.

Match long with long and short with short.

Before you decide what form of credit to use for a purchase, think about how long you’ll need to pay off the debt. Larger purchases, like buying a franchise or new office space, require longer-term loans with lower interest rates. For items that you can pay off more quickly, on the other hand, it makes more sense to use a form of short-term credit. For example, it makes sense to use a credit card to buy inventory, provided you purchase an amount that will generate a profit for you by the time you have to pay your credit card bill.

Tired of Debt? Try Equity.

Most small businesses seeking financing in one of two ways: debt or equity. With debt financing, the onus is on the business owner to repay the amount he or she has borrowed. Equity financing, on the other hand, allows an entrepreneur to give up the ownership of a portion of his or her business in exchange for capital. Equity is not without drawbacks—in giving up a stake of your company to an investor, you give that investor a degree of control of your business decisions. But in opting for equity financing, you’re not responsible for repaying any loans. In offering capital to your company, an investor essentially bets on the future profitability of your company.