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How Start-Ups Can Steer Clear Of Debt Traps

How to make sure you don't get caught in the debt trap

15May

According to a recent survey, only 30% of small businesses survive beyond 18 months. If you take a closer look, you will realise that the unfortunate 70% largely failed as a result of poor debt management. Unless you are ready to walk down the same path, every entrepreneur should focus on establishing his start-up on a firm foundation. So how do you ensure you are not caught in the debt trap?

Keep it lean in the early years

The first few months of every business are very important as far as spending is concerned. If you go overboard unnecessarily, your business might never get on its feet to recover the expenses. Most small businesses assume that they need the best of everything when kicking off. They go ahead and invest in the best furniture and computers to make their business ‘appealing’. As it turns out, this is a recipe for disaster because it doesn’t work this way. Go for what is necessary and sacrifice the luxuries. Planning is very important so you will need to list down all the expected expenses. What is the amount required to settle the fixed expenses? You need to know how much you will be spending each month, especially on loans. What are the likely variable expenses and how much will they cost you?

Yet again, it will be necessary to tally all the expected incomes in the subsequent months. How much will this business be bringing in? What of other sources of income? Consider all the cash flows and finally create your budget. Set aside money for one-time expenses like replacement of a busted laptop. Be sure to trim unnecessary expenses if your business is to stay afloat until it gains substantial ground.

Keep off Credit Cards and Additional Debt

If you want your start-up to stay out of debt, you have to promise yourself to take only what you can handle and only if it is necessary. You need to avoid additional expenses that might result in irrational borrowing. If there is one thing you really want to avoid starting your business, it would be credit card debts. Everyone understands just how tempting it is for anyone to settle bills using that piece of plastic. However, such loans come at higher interest rates, something you don’t really need at the start. Credit card loans should only come as last resort options and in small amounts.

Get the right loans

For most entrepreneurs, initial capital often comes from personal savings or loans. While so many things have been said about loans, several businesses have actually prospered on borrowed money. However, that doesn’t mean you should go out and take money from any source that is ‘willing’ to extend a helping hand. Even before considering this option, you must ask yourself if you will be able to meet the costs and make the full repayments within the stipulated time. If you are in doubt, you can look for alternative sources of capital such as crowdfunding.

If you have decided to go the loan way, you must carry out extensive research. What are your loan options? What are the repayment periods? Be sure to embrace lower-cost solutions such as low-interest loans from credit societies. Before accepting a loan, it is imperative to answer certain questions.

  • Are you getting the right loan for your needs?
  • How is the loan going to affect your cash flows and overall budget?
  • Does the loan require substantial collateral?

Unless you have a good answer for each of the questions above, taking a loan might not be the best funding option for your start-up.

Think of Debt Consolidation

Instead of paying three or four loans, you can compress them into a single loan and make just one monthly payment at a lower interest rate. If your debts are getting out of hand and you have problems keeping them in check, debt consolidation can come in handy. Paying different loans and managing your business at the same time can be hectic. You can save yourself the trouble and make things easier on your side. Information on debt consolidation can always be accessed from reliable financial institutions.

For someone who chooses to stick to settling different loans individually, it is important for you to learn certain essential tricks. The debt snowball is one of them. It involves settling the small debts first, freeing up money to pay subsequent debts. For a diligent entrepreneur, this method should help you settle debts fast and efficiently. You can also consider prioritization of monthly payments. This comes in handy when settling all the monthly bills of your business proves to be challenging. In this case, you will need to rate the payments based on their importance. Have taxes and payrolls at the helm of your priorities with credit card debts and other loans coming at the bottom.

Consider Additional Sources of Income

If you have done everything and it isn’t adding up yet, you can consider looking for other income sources because giving up shouldn’t be an option. Although you need to dedicate much time to your start-up, you can consider a part-time job. This can help you offload some of the expenses and even settle part of the debts. Most importantly, it will keep you away from relying on your business for daily expenses in its early stages.

Conclusion

Whatever it takes, it is necessary to ensure that your business stays out of debt in the initial stages. You cannot afford to be deep in debt when you are still trying to establish your business; it just won’t work out. If yours is already in debt, this post will come handy. 

Sources

Isabella Rossellini is a marketing and communication expert. She also serves as content developer with more than seven years of experience. She has previously covered an extensive range of topics in her posts, including business debt consolidation and start-ups.

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