One of the hardest parts of running a small business is managing debt. When entrepreneurs talk about their struggles with “finances” or “cash flow,” they are usually referring to debt-related predicaments. Every thriving small business is encouraged to maintain just the right amount of debt, since taking on too much debt in an attempt to grow your business can gradually push you into bankruptcy. The main reason so many hard-working and intelligent business owners make mistakes with debt is because there is no real rulebook that says what you absolutely can or cannot finance with debt, no matter the circumstance.
So, rather than focusing on specific expenses, business owners should stick to guidelines that are more focused on helping them keep an eye on their debt and using the right debt financing tools. Here are a few ways to prevent your small business from taking on too much debt:
1. Regularly fund your business bank account
Rule number one for avoiding excessive debt is putting money away on a regular basis. For many small business owners, this simply means funding their business bank accounts during every pay cycle. They take a fixed percentage of their own income and put it into the account, once or twice a month. The more money you put away, the more cash you have to spend instead of taking on more debt. How you use this cash, however, is up to you. Some people like to use it to cover certain minor recurring business expenses, like hosting for their websites or their accounting system membership fee. Others prefer to only dig into this money for large expenses, like a plane ticket for an upcoming conference.
None of this is possible unless you separate your finances, which is why owners of younger operations are constantly urged to open a bank account for their businesses. Even opening a separate personal account and treating it like a business account is better than keeping personal and business finances in one bank account.
2. Use The Right Debt Financing Tools
The two most prevalent debt financing tools are business credit cards and small business loans. While the latter option is typically more affordable, it makes more sense to finance certain recurring or one-time expenses with the former. So, when examining such expenses, you are left with two questions: Which tool should you use, and are you aware of every version of each tool that you can qualify for? Lucky for you, companies like United Capital Source exist to help you answer these questions. And no, the fact that they specialize in small business loans doesn’t mean they’ll automatically tell you to choose a business line of credit over a business credit card, no matter what scenario you present.
For example, it might make more sense to finance a massive purchase with a business credit card that comes with 0% APR for 12 or 18 months. You could make the purchase at the beginning of the year and pay it off with no interest as long as you pay off the total within that time period. Rewards programs are a big factor as well. Some business credit cards give bonus rewards for business expenses like phone bills, Wi-Fi, office supplies, or airline travel.
3. Don’t make big changes without sufficient data
Businesses that take on too much debt in their early stages tend to have at least one thing in common: They tried to grow too fast. This doesn’t just refer to the speed in which they moved forward with a game-changing initiative. More often than not, growing too fast means moving forward without enough data. Before you have amassed a decent track record of ROIs, you need to take it slow and stay thrifty. Your only fixed expenses should be the bare essentials. Only until you have enough data to support your decision should you take on more expenses and (likely) debt.
4. Consider small business loans to pay off existing debts
What makes debt so intimidating is the fact that mismanaging it can drain your bank account in two ways. Not only will you owe money for recurring payments, but your credit score will drop and cause those payments to skyrocket. This is why business lenders advise clients to finance their businesses in a way that will gradually increase their personal credit scores. You never know when you’re going to need a working capital loan or business cash advance. To be approved for the right terms and borrowing amount, your credit history must be virtually flawless. And every business owner knows what just one missed payment can do to their credit.
By increasing accessibility to small business loans, companies like United Capital Source have also increased their functionality. So, instead of failing to pay that vendor or letting that outstanding debt shrink your credit score even further, you might want to consider taking out a small business loan. Thanks to sensible repayment structures, you don’t necessarily have to focus on increasing revenue in order to pay off debt.
Knowing how to manage debt is among the most important skills a business owner can possess. It is directly linked with the ability to choose wise investments, and it will drastically improve your understanding of your own cash flow. Once you’ve learned how to avoid excessive debt, you can finally concentrate on what you do best: providing unrivaled products or services.