Guest Speaker: Mike Wood “How to Keep From Getting Buried in Debt When Starting a Business”
Got debt? Of course you do. I don’t know many businesses that don’t. There is such a thing as good debt and many businesses are able to grow because of it. The problem is when you go so far into debt that it starts to harm your business.
As an entrepreneur you want to lead, not work. When you get into deep debt, you inevitably wind up becoming a micromanager and working in place of employees instead of focusing on growing your business. You justify the savings from not paying employees, but you ultimately suffer as you cannot grow your business when you are the “employee” and not the “owner.”
So what can you do to help avoid getting buried in debt?
Take on the Debt You Need (No More, No Less)
Startup funding is important to launching your business. However, unless you are rich and can self-fund everything, chances are you will be taking a loan or bootstrapping with your life savings, so when it comes to startup funding, only take on what you need. Borrowing more money than you need can often be a crutch to entrepreneurs who use it as a replacement for actually making money with their business ventures.
“Small-business owners and entrepreneurs need money for a variety of reasons, but many are unrealistic about how much money they really need,” writes MultiFunding CEO Ami Kassar. “The point of a loan should be to help your business get to the next level, not the next ten levels. It’s also not a substitute for generating income or a permanent crutch—people that see it as such are likely in much more trouble than they realize when contacting a loan broker.”
In addition to not borrowing too much money, do not take on LESS funding than you need. There is nothing worse than running out of funds. It can cause you to take money from your personal savings and other areas of your business and put you into debt quicker.
Only Spend Money on What You Need
The golden rule for startup capital is to not waste money. If you are taking on a lot of debt (as most new businesses do), that means you are likely not making the income needed to sustain your business. Why then would you spend money on things you don’t need?
“Startups can often have the same mindset as athletes that come into a lot of money,” writes William Ecksel for Tech.co. “After running lean for so long, an influx of cash can often cause you to waste some of that investment. Buying things you don’t really need and failing to budget according to the amount received, can cause you to drain funds rather quickly.”
Ecksel recommends only spending money on things that will benefit your business. For instance, do not spend money to hire people unless you need them. You also need to track expenses so you know where your money is going.
Use Non-Traditional Financing If It Makes Sense
When it comes to non-traditional financing, there are a lot of programs I would recommend you avoid. However, some of them make sense, such as equipment financing.
“There are many ways to use equipment financing and leasing to keep from getting buried in debt when you’re building a business,” says Charles Anderson, CEO of Los Angeles-based Currency Capital. “If you borrow from a bank, they will file a blanket lien on all of your business assets. They may even require you to ‘sweep’ all your cash to them each month to pay them back ASAP. This means that you can’t do much without their permission. Business is unpredictable. Giving yourself a structure that doesn’t leave room for randomness sets you up to fail as a business. You need maximum flexibility.”
According to Anderson, you can save money as you can expense your payments for tax purposes. “With leasing, you keep control of your cash. You keep your assets free with leasing as off balance sheet financing, and you can expense 100 percent of your lease payment, saving you cash by allowing you to pay less in taxes,” he says.
Pay Down Your Debt and Be Happy About It
No one likes to pay bills, but it is fun when you are finally able to pay them off. Make sense? Basically, it hurts when you have to write checks that drain your bank account, but it feels so good when you write the last one you will ever have to write.
You need to redirect your hatred of paying bills into how the actual debt is hurting you. Don’t get mad that you have to pay; get mad that half the money you are sending is going to interest or late fees. Use that as your motivation and get happy about paying down your debt.
Even if you are not paying more than what is owed, paying on time is essential as it will help your business credit according to National Business Capital. “Another aspect to establishing a positive credit history is to make certain to make payments on time,” writes Nicole Kulawski in an article on improving business credit. “Those who pay their bills earlier than expected also find favor with lenders.”
Focus on paying off the debt that will likely get you buried. If you have extra money this month to make an extra payment on your debt, pay the one with high interest rates—the rest can wait.
Paying down debt will help keep you from getting buried, even if you are taking on more debt. If anything, it is like shoveling sand out of a hole that keeps filling up. You will still need to keep shoveling out what you can; if you don’t, you will be consumed quickly.
Summing It Up
It is very easy for a new business to become consumed by bills. Remember that there is such a thing as good debt, and having expenses is all part of owning a business. What you want to make sure of is that you do not get consumed to the point that it hurts your business.
Only take on the debt you need and do not spend money on anything unless you absolutely need it for the business. Think of alternative methods for financing for your business in order to avoid extra parameters placed on you by traditional banks. Pay down debt as quickly as you can and focus on getting rid of the highest interest debt first.