Starting a business often comes with more downs than ups. First, you have to secure capital to get the business off the ground. After opening its doors to customers, you come face-to-face with another problem.
This can throw you as a business owner off balance as you try to salvage the business. Often, you’ll seek out loans in order to solve these problems, but then you aren’t confident the business will be able to pay off the debts.
Therefore, the need to have effective money-management strategies is important in order to realize profits and keep debts at manageable levels as you grow the business. With these tips, you should be able to manage debt from the first day you start.
1. Accept the Situation
Many business owners prefer staying out of debt, which is why they’ll opt for bootstrapping instead of seeking business loans. They claim debts are bad, which is ill-advised and probably comes from advice when growing up.
Another reason is that startups have a lot on their plate to handle, from establishing the business to hunting down new clients, to wearing multiple hats in the initial stages. Worrying about debt only serves as a distraction from the main goal.
However, there are good debts as well, which can help a business get on its feet, or better yet, propel it into a new dimension. The first step for any business to manage their debt is to accept the situation.
A Study via CB Insights, 29% of startup fails because they run out of money, while another 42 percent failed due to inadequate markets. From this study, it’s clear the business owners didn’t have a clear vision for their business.
For any startup, the main focus should be on capital efficiency, burn rate, and above all, your target audience, not on debts. Instead of focusing on the downsides of your business, think about innovative ways you can bring in sales.
2. Create and Stick to a Budget
Now, it’s not a surprise that 9 percent of startups don’t have a budget, as revealed by a study done in the UK in 2016. This trend stems from personal finance management, where many people ignore the important role a budget plays in finances.
Without a budget, you have no way of knowing the amount of money spent on the business, making it difficult for you to plan ahead.
Creating a budget for your startup allows you to monitor setup and operation costs from the day you start the business. Keep in mind, the expenses will fall into two categories, fixed and variable; these include utilities, marketing, salaries, rent and equipment.
When creating the budget, avoid guessing the numbers when allocating money. Instead, take the time to conduct research to ensure you don’t underestimate anything. This is because accessing credit for a startup is an uphill task, which could be a blessing in disguise since it is difficult to drown in debt.
With a budget, you can identify initial costs and also help you draft an elaborate spending plan, which will allow you to clear debts or even stay away from them altogether. In the long, run, this will provide the perfect roadmap to success for your business.
3. Consolidate Your Funding
When starting out, you may be forced to knock on multiple lenders’ doors in a bid to secure funding for the business. This includes banks (which contributed to over half of the biggest companies in the US), angel investors, and credit cards, among others.
One cannot criticize your efforts to kickstart your business, but with each lender comes multiple requirements, subsequent payments, and threats should you delay or skip a single payment.
That’s not all. You also have to carry the management burden associated with each direct cash loan. Such burdens on a young startup only work to drain your energy, and this is a sure way of landing yourself in an ocean of financial struggles.
Therefore, the best way to avoid this is by consolidating your debts to make it easier for you to manage them. Debt consolidation means converting all debts from multiple lenders into a single debt payable to one lender. Not only does this move allow you to track your finances, but also cuts down on interest paid to these lenders.
Keep in mind there are different consolidation loans – unsecured and secured, and the interest rates will vary. For a secured loan, the interest will be low because you’ll use assets to secure the loan. In contrast, unsecured loans come with a higher rate since there is no security.
Before you can put up any collateral, it’s vital to consult a debt consolidation professional so you can understand the available options. Debt consolidation will also allow you to stick to your budget. Also, it’s important for you to analyze your business’s potential when it comes to paying back loans.
If you know it’s going to be tight along the way, then it’s advisable to forget about the loan and focus on the areas that need financing. The others can wait.
4. Prioritize Your Payments
All debts are different, depending on the business. In fact, even in the same business, some debts may be essential for survival, while others may be a bit flexible. This is where debt prioritization comes into play. By listing the debts according to priority, you’ll know which debts can wait, and which require immediate attention.
The latter are debts which can shake your business if unpaid. For example, taxes, mortgages, rent, and utility bills. As you can see, these debts may not be as big but the impact they have on the business is massive. If you don’t, you risk penalties, reduced operations, and lost assets.
You can take care of the less-urgent debts afterward, including credit cards, overdrafts, and bank loans. Start by paying the minimum accepted amount if you cannot afford to make greater payments.
However, take note, you’ll face consequences for delayed or skipped payments. This may include fines and repeating the same mistake will sink you in serious problems.
The best way to prioritize debts in your business is by listing the debts and stating whether or not they are essential to business survival. Also, indicate the interest rates starting with the highest. Clear the loans starting from the top while paying the minimum amount on the less urgent ones.
5. Trim Unnecessary Expenses
By the end of the 3rd quarter of 2017, global debt levels were at an all-time high of $233 trillion. Of this, non-financial companies took up $68 trillion. The Institute of International Finance revealed this.
According to these figures, it appears that getting into debt is easy when starting a business. However, when these debts get out of control, then your business will take a nosedive, which is why you must start analyzing your expenses with the aim of finding and trimming unnecessary ones.
For example, new equipment isn’t necessary for a startup. Instead, go for second-hand items or even consider leasing the equipment. This can give you first-class services for half the price. Another tip for reducing expenses is hiring freelancers. Since they work remotely, it means reduced office space and also reduced office overhead.
6. Consider Professional Financial Advice
Chances are that you are not an expert in finance or business management. However, because you own the business, it’s inevitable not to take on multiple responsibilities because you may be cash-strapped.
On the other hand, taking on too many responsibilities can land the business in trouble. Seeking professional financial advice can help you in organizing your finances, thus getting you back on track faster than you otherwise would.
You can be sure that you’ll face tough financial periods at some point in the life of your business. This is despite having well-crafted business plans, since some elements may be out of your control. Therefore, the only way to avoid losing the business is by managing your finances well through the tips outlined in this article.
For those already in debt, you can still stand up, dust yourself and get back in the game. All you need is a determination and organization.