Small Business Debt

5 Ways for a Small Business to Avoid Debt

Small business owners face a variety of challenges which inherently come along with entrepreneurship.

When you own a small business, the last thing you want to deal with is debt, however GoDaddy reports that 88% of small businesses aren’t able to avoid it. This is highly problematic, especially when you consider the extent to which debt drains small business owners, particularly those who are just starting off.

Left unchecked, debt has the power to completely decimate a small business. It’s easy for late payments and interest to pile up. Small business owners who face this plight are still responsible for covering other expenses, such as overhead, workers’ wages, and so much more. Of course, there are businesses who manage to survive in spite of debt and even use it to their advantage in some cases. Unfortunately, not all entrepreneurs are this fortunate. Strategic business practices and the general knowledge of what it takes to avoid going into debt can be absolutely paramount to the long-term success of a business.

Self-Funding

One of the best ways for small business owners to keep themselves from going into debt is to self-fund their enterprises. The U.S. Small Business Administration notes that entrepreneurs can capitalize their own business ventures via savings, support from family and friends, or even 401K funds. Of course, raising enough capital to self-fund a small business can take time, depending upon the nature of the business. In many situations, time and patience to raise money is vastly preferable to taking out a loan with interest, thus burdening a business owner with the procurement of debt.

At this point, it is critical to note that self-funding a small business does come with a degree of risk. For instance, there is always the possibility that the venture may fail, while using 401K funds can also generate various fees or penalties. If an entrepreneur uses their own capital to self-fund a business which doesn’t succeed,  it goes without saying that they have no way of getting their investment back. Ultimately, there is always risk associated with any method of funding; however, not starting off a business in the financial hole certainly comes with advantages.

Budgeting

Budgeting is a critical skill for any business owner that is serious about not mismanaging their finances. Both having and sticking to a budget ensures that entrepreneurs can track spending, note costs, and be aware of how much money is coming in and going out each month. Small business owners who stick to a budget will also do well to manage their accounts and observe overall profits. If the business is consistently breaking even each month or losing money, these aren’t good signs. Under these circumstances, an unexpected expense is all that’s needed to throw finances into the red and force a business to borrow money.

Increasing Revenue

Increasing the income of a small business is obviously one of the main goals, and can normally eliminate the need to borrow money. Thankfully, there are several ways for entrepreneurs to take this course of action and secure the longevity of their professional ventures. Diversifying by up-selling & cross-selling additional products and/or services to the consumer base is a very popular method of increasing revenue, as noted by Fundera. Depending on the nature of an entrepreneur’s small business, strategies for increasing income can also include raising prices, offering limited-time promotions, or even ramping up your accounts receivable strategy.

Decreasing Expenses

Similarly to increasing income, small business owners will find that decreasing their expenses helps them in more ways than simply avoiding debt. Reviewing the necessities within a small business and eliminating any excess, unused memberships or subscriptions are simple ways of cutting back on costs.

Business News Daily furthermore confirms that hiring freelancers is a step which is advantageous to small business owners; working with freelancers not only allows for entrepreneurs to find talent which specializes in their areas of need, but this choice can also be much more cost-effective than taking on part-time or full-time employees.

Making Punctual Payments

When dealing with credit card balances, all payments should be made on time. This is very important to steering clear of debt and the subsequent interest charges which follow. In addition to punctually paying off balances, maintaining a low balance will also increase your credit score. In the event you need to finance or lease a piece of equipment for your business, it’s imperative that you have a good credit score and limited outstanding debt in order to get the best terms and interest rates.

Conclusion

Being in business for yourself comes with many challenges and not everything goes as planned. Even if you find yourself in a situation where you are unable to completely avoid debt as a small business owner, the strategies listed above can still prove to be helpful.

Missteps in business are corrected by making the proper changes and improvements as you go. With time, tenacity, and smart practices, give small business owners the opportunity to reap the rewards for diving into entrepreneurship.