Starting with nothing and building a business from the ground up is one of the proudest of American dreams. Unfortunately, 50% to 70% of all small business startups don’t make it past their first 18 months in business. Bad debt management is one of the biggest reasons small businesses fail. Here are some tips to help you stay out of debt and build your business on a solid foundation.
1. Don’t Borrow If You Don’t Have To
The first key to staying out of debt is not to borrow to begin with. The truth is many small businesses don’t require a large outlay of cash at the onset. In fact, most small businesses are started with less than $5000. Many small business owners use funds from their personal savings, the sale of personal assets or gifts or loans from friends or relatives to get started.
2. Live Lean in the Early Years
Make a list of your personal expenses and prioritize them. Be sure to list your fixed expenses like mortgage and car payments etc., along with variable expenses like utilities, insurance, food and healthcare.
Next, determine the minimum amount of money that it will take to maintain all your fixed expenses. Finally, see if you can reduce or eliminate variable expenses. The more you can trim your personal expenses, the less your business will need to produce to keep you afloat, at least in the beginning.
3. If You Must Borrow, Get the Right Loan
Be sure to research your loan options carefully before borrowing money for your business. Look into lower cost solutions like low-interest loans from a credit union or bank, before considering higher-interest options. Also, consider the amount of collateral you’ll be required to put up to obtain the loan. How much are you willing to risk to get more working capital for your business?
4. Only Use Borrowed Money for Revenue-Generating Activities
When you do borrow money, make sure you use it wisely. The best advice is to use any borrowed funds for revenue-generating activities and essential expenditures only.
Don’t make the mistake of borrowing money for depreciable assets like computers or office furniture if they aren’t bringing money directly to your bottom line. Nice office furniture is a plus, but it won’t matter much if you don’t have any customers to see it. Steer clear of “splurging” on items that only serve as window dressing and avoid the debt traps these celebrities have fallen prey to.
5. Reduce Capital Expenditures
Take a bare-bones approach to running your startup, at least during your first year in business. Buy only what you need and try to buy used equipment whenever you can.
You might also consider working from a home office or garage or renting office space, rather than investing in commercial real estate. Finally, outsource services to avoid buying specialized equipment. For example, if you don’t need to print color copies frequently, don’t bother investing in a color laser printer. Instead, outsource your occasional needs to a reputable printing company.
6. Create Other Income Sources
If the numbers still aren’t adding up, consider taking a part-time job or develop other sources of income by selling products on Ebay, private label selling on Amazon, or starting affiliate websites. Maybe you can offer your services on freelance sites as well. The extra money you make could cover your expenses, at least in the short-term until you can get your business off the ground.
7. Create a Plan to Eliminate Debt
If you’re considering taking on debt or already have some outstanding loans for your business, make a plan to eliminate your debt as quickly as you can. Start by dedicating a portion of your monthly profits to paying down debt until you are debt free.
While staying out of debt won’t take away all the risks you face when starting your own business, it’s a great step in the right direction. A direction that may just lead to a stable, profitable business you’ll be proud to own for years to come.