Starting your own business is going to cost money, no matter what. You’re bound to accumulate some debt as you set up your company, but there’s good debt and then there’s bad debt. Good debt includes money taken out in small amounts you know you can pay back, and it contributes to establishing a solid credit score for your business.
Bad debt, on the other hand, tends to pile up and negatively impact your venture. Learn how to avoid falling into debt as you start your new business so you won’t get buried in debts you can’t repay.
Know Your Spending Limits
Before you take out a business loan or invest your life savings in your startup, have an idea of how much you need to spend upfront. It’s also wise to know how much you can afford to spend; many small business owners take out large loans that they find themselves unable to repay later.
If you plan to apply for a private startup business loan, avoid asking for more money than you really need. Even if you qualify for a substantial amount, remember that you’ll have to factor repayments into your budget.
Pro Tip:
Find a happy medium between asking for too much or too little. If you ask for a loan that’s too small, you risk running out of funds when you need them most.
Spend Money on Needs, Not Wants
In the early days of your business, your financial belt will need to be tight as a default. When it comes to spending your startup capital, the golden rule is not to waste it. As you set up different areas of your business, prioritize spending your capital on the things you can’t operate without.
Think about lottery winners and professional athletes who come into large sums of money practically overnight. Many of them are overcome with adrenaline thanks to their windfall, and they spend irresponsibly because they can’t imagine the money ever running out. Don’t fall into this trap with your startup capital—that initial sum of cash will run out eventually.
Do Your Financial Homework
There are plenty of financing options to consider if you want to start a business. Some of the options to choose from include:
- Small Business Administration (SBA) loans
- Personal loans
- Venture capital investors
- 401(k) business financing
- Self-funding, or bootstrapping, with your own savings
None of these options are one-size-fits-all. If you have a checkered credit history, for example, you may have some difficulty securing a loan. If you’re under the age of 40, you may not have sufficient funds in your retirement account.
Research the funding options that make the most sense for your business before applying for any loans or financing. If you do apply for a loan, make sure you read all of the paperwork—including the fine print—before signing anything.
Create a Strict Budget
When your business is just getting started, you won’t have any profits to ease your financial strain, so you’ll need to be careful with how you spend your money. Follow these steps to create a budget and stick to it every month:
- Figure out your income sources. How much money do you bring in every month?
- Note your fixed costs, like monthly bills and loan repayments.
- Factor in your variable costs, like bills that may not be the same amount every month.
- Set aside money for one-time expenses like equipment costs.
When you know exactly how much money is coming and going every month, you’ll have a better picture of your financial health. You will be able to see how much wiggle room you have, which can help you predict potential funding needs.
Avoid the Temptation of Too Many Credit Cards
Taking on debt is easy. How much junk mail have you received over the years from credit card companies practically begging you to go into debt? Just because you qualify for an extra credit card doesn’t mean you can afford that extra bill every month.
As we discussed before, a windfall of cash—or a hefty loan, or a credit card—can inspire you to make irresponsible spending decisions. If you do decide to use a business credit card, use it only for emergencies or small expenses, and pay off the balance in full every month.
Pro Tip:
A single business credit card can be a good idea if you know how to use it. Choose a card that gives you perks like cash back or airline miles, and pay it off on time to increase your credit score. Designate it solely for specific business expenses to lessen the temptation to use it for every little purchase.
Consolidate Your Business Debts
If you have outstanding debt from multiple lenders, each of them will charge interest separately, and those expenses can add up over time. Talk to your creditors about the possibility of consolidating your small debts into one loan. It will be easier to keep track of one loan to pay, and you’ll save time in the long run.
Is consolidation not on the table for you? Try the debt snowball method. Take stock of your debts and pay off the smallest one first. This frees up money to pay off the next one, and so on. If you’re conscientious of where your money goes every month, you’ll be able to pay down your debts more quickly.
While some level of debt is unavoidable when starting a small business, you don’t have to fall headfirst into a mountain of it. It’s absolutely possible to avoid debt when starting your small business if you are diligent about making monthly and quarterly payments. Resist the temptation to spend money on frivolous non-essentials and prioritize paying off the debts you’ve accrued.
Are you interested in seeking out unique financing options for your small business but don’t know where to start? Pango Financial has a funding solutions tool that makes the process easy. Learn about the business funding options available to you, and choose one that will help keep your debt low.
