Debt is a friend of the startups and small business owners. You can never escape it.
Nobody loves to be in debt. It simply takes away your peace of mind and financial freedom.
Startup or the small business debt is something almost every rising entrepreneur faces. But how do they get into debts?
Starting a business takes money. Don’t believe anyone who tells you; they can teach you to start a business with no money.
There is something called “startup cost or expenses”; it is not free. It is the cost of starting a business. To grow that business you started, you would also need what’s called “monthly expenditure”; it is neither at no fee.
This is also a cost you budget for when planning to start a business, started a business or sustain your business. So you see, starting and growing a business requires funding. Now, you fairly know starting and building a business is not free?
Where do startups get their funding if it’s not for free?
I remember noting in a previous article that, nobody goes to the market without money and return with food stuff or groceries.
You go to the market with good enough cash (budget). You buy the things you need (business need, e.g., equipment, rent, etc.).
Perhaps, you may make a list to avoid impulse buying. (buying out of the list).
Same with startup entrepreneurs. They save up for the expenses and make a list of the things they need for their startup business.
There are so many ways startups raise money for their businesses.
Here’re a few ways they raise their capital:
- Personal funding
- Family and friends
- Grants
- Loans
- Incubators
- Venture capital
- Partnership
So here’s the reality; raising money for a business is not a child’s play. You need proper financial planning or management skills.
From the word go, your financial management or planning must be structured.
The failure of this healthy financial practices leads startups straight into debts without a curve. Yes, they have ways of raising the funding but how do they manage it? Most times, it’s even a hurdle raising capital for business and growth expenditures.
What does DEBT mean?
An amount owed to a person or organisation for funds borrowed. Debt can be represented by a loan note, bond, mortgage or other form stating repayment terms and, if applicable, interest requirements. These different forms all imply intent to pay back an amount owed by a specific date, which is outlined in the repayment term.
Why do startups get into debts?
Briefly, here’s why startup entrepreneurs get into debts.
Unplanned expenditures
Unplanned expenditure is simply spending on things, not within your plans. Looking at the scenario from the introduction of this very article, I noted that there is something called startup expenditure and as well as monthly expenditures which need to be planned for just like the list you make for your groceries for the market. Spending on things out of the planned list is an unplanned expenditure. Allocating funds for things not initially planned for.
As long as there is an extra money going out for things not planned for, you would eventually end up borrowing extra for things you would be in dying need of. It is true somewhat that, startups get a bit scattered around about their actual need because they may feel at a point in time, something could be of importance which may not be in the expenditure cost. But as a startup entrepreneur, it’s very necessary to learn to adjust within planned expenditures. Make use of the listed expenditures and avoid having to need extra cash which you may not have and end up borrowing; the result would obviously be debt not profit.
More cash out, less cash in
When you make less or no money (profit) but you keep spending, you end up in debt. The question is; where from the extra cash or income for expenses if less comes in(less income) than goes out?
You either borrow or use up personal funds. Personal funds for your business is borrowed money; in accounting, that’s how it’s recorded, so you treat it as such. It’s a personal loan to your business. It is important to have more cash coming in than being spent to avoid debt.
Unreasonable/unnecessary borrowing
Sometimes, startups feel the need for extra cash for things they think they actually can’t do without. How do you know when you borrow unnecessarily?
When you borrow to solve a situation you can manage or adjust until you have made a little more cash (income) to solve is simply unreasonable. Learn that; you only borrow when the outcome of the “borrowing” would yield a 100% and more result (profit).
Don’t borrow, if you can manage or adjust.
Having looked at a few reasons why startups end up in debt, let’s see how we can deal with managing those debts or avoiding them.
How to manage or deal with startup debts
Firstly, there’s an adequate way for debt management on the professional level. There are professionals who can manage your debt situation with some level of guaranteed results; even better very good results. But we are looking at managing it at a startup level, where you can avoid getting to employ a professional debt management company or personnel.
Here’re a few tips to manage your startup debts.
Cut out cost
Priorities, priorities, priorities. This is very important to your startup growth. What has value, what comes first, what needs no attention is key to a good startup and small businesses financial management. Never spend out of your expenditure list. Make monthly expenditure budget to guide your spending. This is needed as startup entrepreneur as a key to building a sustainable businesses growth.
Most often, as a startup, it is easier to adjust and manage than ‘big’ businesses, because they have ‘bigger’ needs. Know what is relevant to your business and cut out unnecessary cost.
Practising this would save your startup business from failing to have a good feel of what success is and avoid debt.
Spend wisely!
Restructure or adjust budget
I have mentioned budget so many times. If your initial budget for a monthly expenditure is not working, revisit it and adjust it. There is no crime to reconsider a budget and rule out things you think you could do away with for a while. In fact, it is wisdom. Financial management is one of the most important practices startups, and small business owners need to adapt quickly than any other skills. With this, you are assured of financial freedom.
Hire a professional accountant
Well, not everyone has the financial management skills to manage their startup finances quite well. Nobody knows everything they say. Get help if you can. A professional accountant can help you avoid such debts as well as retain in more cash for your growth. If you can’t afford the help of a professional accountant, talk to your company’s bank (where you save for your business) they can assign someone to help often or assist you with managing your finances adequately to avoid getting into debt.
Increase income
What is a business without a good income? A good income is a fuel to your growth. How do you increase your income? Look at your services, how can you increase the use or purchase of your services or products? There are sales promotions, make use of client recommendations, special service offerings, etc. strategically develop plans to increase your income.
Spend within your means or use what you have
Exactly what most startups can’t avoid. Just learn it! What you have is what you use. It is logic to know that, when you spend what you do not have, it is called debt. Yes, it is not as easy and simple as it sounds but how do you spend when you do not have?
Small business and startup debts can be so much avoided if the right financial management is practice. Adapt good budgeting habits, spend wisely and know when you need to borrow. If you have to borrow, borrow wisely!
I have with a great deal considered your numerous requests for a one-on-one coaching and consulting. It is now available and taking appointments on availability.