Setting up a new business is a goal that most people will find rewarding and impressive. However, first-time entrepreneurs will face overwhelming responsibilities and challenges that will take up their time, effort, and finances. One such challenge is debt, a word that is well acquainted with small business owners. The term ‘debt’ might evoke a negative image in most people’s minds, but it is imperative for some businesses. It might even be a crucial instrument for your new business’s success as long as you can organize and manage your finances, whether for personal or business use. Stated below are essential points that can help you effectively manage debt as a small business owner.
How Personal and Business Debts Affect Business Owners
Personal and professional debts might seem like they are eons apart from each other. However, most people don’t realize that both types of debt can still affect your business and play a role in its overall success. In fact, 50% of small businesses fail within their first five years because of too much debt and other factors.
Personal debt ranges from mortgages, student loans, medical debt, auto loans, credit card debt, and a whole lot more. When these types of debt are not closely monitored, things might quickly become impossible to manage. Business owners, who often rely on loans, might have a more challenging time taking out small business loans as lenders will consider your personal credit scores. Mortgage loans, in particular, are the biggest contributors when it comes to poor credit history. It is vital to only deal with reputable mortgage companies that have good lock-in periods and reasonable fees.
On the other hand, business debts cover business lines of credit, purchase loans, real estate loans, and more. You might need to take out a loan to buy a company and establish a physical address. Purchase loans for the needed equipment should also be considered. Others need working capital loans to grow and expand their business.
Dealing with all these different kinds of debt can be overwhelming, which is why it is a good financial practice to sort out your personal and business debts. This can be done by keeping separate bank accounts and keeping track of both types of finances.
The Difference Between Good Debt and Bad Debt
With the various types of debt come various classifications. Some might be good, while others will always be bad. It is best to acknowledge and differentiate these two types of debt for your business to flourish in the long run.
First, the money you borrow that can ultimately produce income and add money to your wallet can be considered good debt. Debts under this classification are beneficial for businesses because they can improve business credit scores. Better business credit scores, in turn, allow you to quickly get on the good side of suppliers and lenders, so they can give you more convenient and favorable terms.
The debts that can be classified as bad do the exact opposite. Bad debts will not contribute to your income and will even take money straight out of your pocket. They can extend to even damaging your net worth. These are usually short-term loans that come with high-interest rates.
One thing you can do to manage good and bad debts is to formulate a tactical plan that will monitor high-interest debts. The more aware you are of the interest you are racking up and the time you have left to pay, the more motivated you are to pay them off. To help you keep track of your current financial state, you can use accounting software. Many entrepreneurs find these systems fundamental to running their business, increasing efficiency, and better managing cash flow.
How You Can Better Manage Cash Flow While Dealing With Debt
According to a U.S. Bank study, 82% of businesses have failed due to cash flow issues. Many new business owners deal with this, especially these days when COVID-19 has negatively affected businesses worldwide. It is necessary to be on top of cash flow statements to avoid any future problems that will negatively impact your business. You can do this by following these three simple steps:
The first step you need to take is to acknowledge your current state and figure out your action plan. One thing you can do is increase your short-term revenue. Offering reduced prices of your products can help you get funds at a faster rate. You can also set appointments with your banker or accountant and discuss your business plan and find more clients to help you with your business.
The second step is to formulate a cash flow statement and projection. These documents can help you keep track of your monthly, weekly, or better yet, daily cash flow. A cash flow projection can also be a useful tool that can help you manage your cash and set goals for your business’s different expenses. This is basically a documentation of customer sales, loan funds, interests, incoming money, etc.
Lastly, being practical about your current situation and your present options will prevent you from being overwhelmed with debt levels you can acquire. It is best to consult local business advisory agencies for professional assistance. With the right amount of determination, staying comfortably in business can be possible.
To conclude, there are many cases where new and fresh business owners fail at least once in their journey to success. Making yourself aware of your situation and doing your best to figure out effective strategies can eventually help you succeed.