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According to Business Insider, 50 to 70 percent of small businesses fail within their first 18 months. The reasons for these failures are varied—bad location, bad marketing, bad business plan, etc.—but one of the biggest killers I’ve seen is poor debt-management skills.
Frankly speaking, there are no foolproof guidelines for opening a business. There will always be risks involved; but you can mitigate the risks, so that your business doesn’t become one of the 40,000 small businesses that file for bankruptcy every year.
1. Consider your funding options. Before running to your bank for a loan, consider whether you'll be able to repay a loan. If you're not sure, investigate alternative funding methods such as crowdfunding or startup incubators. These funding opportunities can be a great way to avoid several bank loans that carry high interest rates.
2. Educate yourself on loans. If you think a loan works best for your business type, you need to do some research before diving into the first loan that your business is approved for. Learn everything you can about loans. Is the loan the bank is giving you the right loan for your purpose? How will this loan affect your cash flow and budget? Does this loan require substantial collateral? You should know the answers to all these questions in detail before accepting any bank loan.
3. Devise a strategy for how you will repay the loan. Once you have chosen the right loan for your business, it’s important to sit down and write out a strategy for how you will repay your loan.
A big portion of this strategy should be devoted to creating a detailed budget that you can stick to, which means giving yourself as much breathing room as possible. You may also choose to do an analysis on how your business will exponentially increase revenue and reduce overhead costs each month. These written plans can both give you and the bank confidence that you'll be able to repay your loans.
4. Prepare a contingency plan. As Louis Pasteur once said, “Fortune favors the prepared mind.” To any entrepreneur, this should translate to, “Even if you have the best intentions and plan ahead, you should still plan for the worst-case scenario.”
Having a contingency plan means you’ll be able to claw your way out of unforeseen debt or withstand a tanked economy. I recommend researching several debt consolidation methods, such as the debt snowball method and the “large bills first” method to decide how you will pay off your debt.
5. Make a plan to stay out of debt. Once you pay off your loans and credit cards, you should try to stay out of debt as much as possible. Always strive to evolve your strategy as your company grows. Seek advice from industry professionals and others who have been in similar situations, and continue to educate yourself on the most up-to-date debt management tools and theories.
Uncontrollable debt can kill the profitability of any company and eventually run it into the ground. Creating strategies on how to stay out of debt from the beginning is the best way to protect your business.
