Starting a business will always require startup expenses. However, don’t make the mistake of going too much into debt at the startup stage. When it comes to operating a business, you will reduce your risk of going bankrupt if you have the extra cash flow without an added debt.
Millennials are entering the startup scene at a furious pace, averaging $10,000 to $15,000 in student loan. This means that many startups are already in debt before even spending a dime on the business. As such, starting a business requires a strategic plan to help prevent the further accumulation of debt.
Here are some tips to keep yourself from getting too far in debt as a new business owner.
1. Think Carefully Before Getting a Loan
You want to be mindful of getting a loan for your business. Would the loan be used for operational expenses or is this just a “cherry on top” for your business? If you need the money, then it may be necessary to take a business loan. However, if there are just additions you want to make to your business, think about holding off until you have the funds to do it.
If you do go after a loan for your business, be mindful of the fees involved. Most business owners make the mistake of getting themselves into a loan without realizing how bad they will be going into debt. If you have a bad annual percentage rate (APR), it could wind up costing you more than the principle of the loan over time.
2. Consider Crowdfunding
Crowdfunding has been causing a frenzy around the world since it launched almost a decade ago. The purpose of a crowdfunding website is that it allows business owners to reach their targeted audience and get money from them as an investment in their project. So what’s the point of this?
Well, for most companies, crowdfunding will give you the option to get the necessary funds for production and operation costs without having to get a business loan. You are appealing to the “everyday person” and you won’t even have to pay them back for their investment in your company. Most times, you’ll have to offer them a product of yours (in future launches) as an incentive for investing in your business.
3. Sharpen Up and Pay Attention to Your Loan Manager
If you have already taken out a loan for your business, look deeper into the agreements that you’ve signed. There are banks that like to catch you in a “bankrupt trap” that involves you consistently needing to borrow more money to pay off your previous loans. Banks do this to get continuous interest rates off you.
Look to see if the bank offers early repayment rights to help you with getting out of the loan. While all loans are legally bound to have “early repayment rights” it doesn’t always work in your favor. Some banks purposely trap small business owners in small loans by charging outrageous fees for cashing in on the early repayment. This makes it almost impossible for you to get out of debt without paying the full term of the loan.
4. Avoid Short-Term Lenders
If you have to apply for a loan, you want to avoid short-term lenders. These companies may be able to supply you with funds in under 24-hours, but it usually comes at a uniquely high APR that you’ll never get charged anywhere else. In addition, most of these lenders are known for stalking businesses and their owners to hassle them on repaying the loan, even if you’re only a day late.
Going with a short-term lender is like swimming in a sea of sharks. You deserve better than that, so try to wait for the 10-days to get the money from a traditional bank or lender than with a short-term lender. You will save yourself thousands of dollars in the long-term.
Minimize Your Debt-Ratio as Best as Possible
It may be unavoidable for you to have to take a loan out on your business or to seek financial help elsewhere. It’s important that you are keeping in mind all of the terms in every loan and agreement you sign so you fully understand the repayment terms. You can use this information to minimize your debt-ratio quickly and get your numbers from debt to earning money back on your business.
Take time to learn about how you get can best manage your small business, instead of worrying about going into debt, so that you can be a successful entrepreneur.