Being an entrepreneur and running a business is anything but easy. If you have been managing a company for some time now, you are already aware that staying out of debts is difficult. Funds are required every step of the way, and entrepreneurs often have to rely on loans to fulfill much of their financial obligations.
Saying that running a debt-free business is impossible would be wrong. However, when it comes to managing multiple tasks such as upgrading systems, making payroll and investing in modernization to boost business efficiency all at once, it is only natural that a business, especially a startup, would struggle financially.
Why should a business avoid making debts, though?
It is simple – borrowing money renders the borrower obligated in some way or the other to the lender. Debt not only increases risk but also leaves a business vulnerable if it is faced with a sudden economic downturn. Instances of companies going bankrupt and eventually out of business after hitting a rough patch are not particularly rare.
On the other hand, businesses that manage to steer clear of debt may take time to grow and expand, but when they do so, they do not have to worry about paying off a substantial amount of loan and risk operating on a tight budget.
Did you know that debt amplifies businesses? Entrepreneurs operate on ideas. It is to be noted here that it is often impossible to determine whether an idea is good or bad at the initial stage. If you invest in a plan that later on turns out to be less than profitable, that investment can turn out to be a very costly mistake. Financing a seemingly ‘great idea,’ which may or may not yield favorable results in the future, with borrowed money can be too much of a risk to take up for a business, especially a new one. Failure to realize a substantial return on investment can lead to delayed payments, and even bankruptcy and shutdown of the company.
Some misconceptions about business debts to avoid
It is a wrong concept that businesses cannot start without a massive capital and that an aspiring entrepreneur has to borrow a substantial amount from a lender to realize his dreams. However, according to the experts, most businesses can start with less than $6000, and then work their way towards growth. That makes it easier to track cash flows and transactions.
Many people think that it is impossible to function on a day to day basis without a credit card. However, all one needs is his debit card to make simple purchases, bookings, and payments. A simple accounting system can keep track of all the expenses, and the individual would not have to put up with exorbitant interest rates or massive expenditure all at once regularly.
One can even avoid debt for more significant purchases like machines, systems, and real estate. Renting is a good option until one can pay for the purchase and so is outsourcing until it is possible to build an in-house team. Buying used goods is also an option as their rates are considerably lower than new ones. Last but not the least is the option of saving. One should save systematically until the time they have accumulated enough fund.
What are the 5 best strategies that entrepreneurs must follow to stay out of debt?
Do your research well
If you need to borrow money, there is no way you can consider doing so without some research. You need to know as much as you can about your options and then weigh them well. If you have even the slightest doubt about whether you will be able to pay back a loan, you must consider other options like startup incubators or Crowdfunding. Before applying for a loan, gather necessary information about the package, the terms and conditions, and the lender irrespective of whether it is an individual or a bank. Ask all the right questions like, “What is the collateral?,” “How will this loan affect my finances and cash flow?,” “Will the loan package that I am availing suit my requirement in the best way possible?” There can be dire consequences of getting stuck with the wrong loan.
Set a budget
It is vital that you make a budget and stick to it. It will help you understand how much money you can spend a week or month, and also set up a strategy on how to pay back your loan in a systematic manner. To set a realistic budget, the factors that you must consider are your income sources, the expenditure estimate, onetime expenses, and interest rate on existing loans.
Avoid getting more loans and even spending too much on credit
It is a bad idea to bite off more than you can chew. If you want to avoid accumulating even more debt, you must not go overboard with your expenses, especially the business-related ones. Stick to the things that you can afford. As for grand promotional activities and expansion, they will happen eventually. You must be patient!
Think about increasing your sources of income
You can think about earning some money on the side while your business is strengthening its foothold in the market and paying off the loan. As an entrepreneur, you must avoid credit card debt, and earn considerably from sources other than your business while it is indebted to the bank. It can help you steer clear of new loans and also help you to make some savings.
Do not miss payment
You are probably already aware of the importance of paying off a loan on time. You can consolidate all multiple loans into one and gradually pay it off, often at a lower interest rate. You can also go the debt snowball way. In the latter, you can pay off the smallest loan first, thereby freeing up the money to pay off the next one and so on.
Businesses that are already dealing with massive loan payments should not stop trying to be debt free. Not all entrepreneurs can start debt-free, but it is possible to get there. It is a good idea to set up a three to five-year plan. It will efficiently reduce, if not eliminate the debt by allocating a particular portion of monthly income to loan payments. It is also important to avoid big purchases, until necessary, so as not to make new debts.
It is at this juncture that savings play an instrumental role in supporting the business. Having substantial savings can help the company grab the opportunities that come its way. While this can ensure a steady income, and maybe some profit too, it is after the complete repayment of existing loans that the entrepreneur can hope to start making a profit. Eventually, the time when the company begins expanding will come, and the entrepreneur will be able to be generous with his team and community.