Most businesses take on some form of debt – be it a single loan to cover start-up costs or multiple loans and credit cards over time. It’s important to learn how to manage these debts. When handled correctly, debt can be a great form of investment for entrepreneurs. If handled improperly, debt can lead to the downfall of a business. Below you will find 10 tips for dealing with debt healthily.
What awaits you in this article:
1. Explore bank loans for large startup costs
The largest loans are typically taken out when starting a business. These loans are often needed to finance expensive equipment, marketing and licensing.
Banks are still among the best lenders for these types of loans. Compared to some lenders, banks can offer much larger loans at significantly lower interest rates. Banks also won’t force you to continue borrowing money like some private lenders do.
The catch is that these loans aren’t as easy to get approved as many personal loans. As a rule, there are stricter admission requirements and you will have to wait longer for your application to be processed. Therefore, you should apply for these loans well before starting your business.
2. Use a credit card for small business borrowing needs
Credit cards are better suited to covering smaller credit needs. While you can get some credit cards with a high spending limit, for most business credit cards the limit is between £1,000 and £10,000.
You can purchase business credit cards that come with all sorts of rewards and benefits. It’s worth taking the time to compare these and general interest rates.
Credit cards are great for covering emergency costs because you don’t have to go through a lengthy application process to get a loan. Instead, you can use it like a debit card to quickly deal with unforeseen urgent costs.
3. Know your monthly budget before taking on new debt
It’s important to have a clear idea of what your monthly budget is so you know how much debt you can afford. You need to earn enough to cover monthly repayments as well as any other ongoing costs associated with running a business.
Many businesses make the mistake of taking on too much debt too soon and ending up with negative cash flow (this cash flow definition page goes into more detail about the importance of maintaining healthy cash flow). Limit taking on new debt if you already have a low profit margin.
4. When applying for large loans, create detailed business plans
When applying for a large business loan, most lenders will expect a detailed plan of how you plan to use the loan, as well as proof of your ability to make the loan repayments.
It may be worth working with a financial advisor or accountant to create a detailed financial plan to increase your chances of approval. A detailed plan will also help you determine whether a loan is truly justified and whether you can actually pay it back and still get a good return.
5. Separate your business and personal finances
When starting a business, it is always a wise decision to open a separate bank account for your business and ensure that all business-related debts are paid from there. This ensures that business debt does not impact your finances.
It is also advisable to change the legal form of your business to a limited liability company to reduce the damage your debts could cause. A limited liability company is considered a separate entity to you and only funds and items belonging to your company can be used to pay off debts owed to your limited liability company. This means debt collectors cannot seize personal items to pay off your business debts.
6. Improve your company’s credit rating
Just like a personal credit score, a business credit score determines which loans and credit cards you can access. If your business credit is good, you will have more loan options with lower interest rates. If your business credit is poor, you may find that you’re limited to a handful of lenders – and that they all charge high interest fees.
There are several ways to improve your business’s credit score. One option is to simply pay suppliers and lenders on time to show that you are a good debtor. You should also make sure that you never exceed your overdraft limit and always achieve good sales.
7. Make managing large debts easier by consolidating
The more debt you have, the harder it can be to stay on top of things. One way to make these debts easier to manage is to combine them into a single debt. This means that you will have to pay off all your debts with one large loan.
There are business loan lenders that offer these consolidation loans. Take the time to compare interest rates and installment amounts.
8th. Alternatively, you can use the debt snowball method
The debt snowball method is another way to get multiple debts under control. The idea is to put as much money as possible into paying off the smallest debts and then focus on the next smallest debt before working your way up to the largest debt.
This is a good approach if you want to avoid taking on additional loans (even if they are for consolidation purposes).
9. Know when to rent/outsource instead of buying
Many business owners overestimate what type of equipment they need to own. There are many types of equipment, from vehicles to desks, that you can rent instead. Many rental companies have high-quality equipment and some are even willing to cover the repair costs. These are perks you don’t get when purchasing equipment with credit.
Of course, renting can be more expensive in the long run, and you can’t change the equipment you rent. Therefore, it may not be suitable for all types of devices.
10. Don’t forget about grants, investors and crowdfunding
There are many other ways to finance business expenses without having to borrow money. Many business owners overlook state and local grants, which come in many forms and are essentially “free money.” You also have the option of getting funded by investors – although this means offering shares of your future profits, it is still a better alternative than expensive loan repayments. Crowdfunding is also an option that involves raising money from many different people (either through donations or in exchange for small shares). You can explore crowdfunding platforms online.