I don’t have to tell you that starting a business is expensive, but you might not be aware that many small business owners accrue substantial personal debts due to the time, energy, and funding they pump into their dream venture.
While your small business is getting off the ground, you will be forced to make a number of financial decisions that will impact your and your company’s health for the foreseeable future. If you want to avoid interminable years of debt payments, you should try to avoid these money mistakes that can put you and your business straight in the hole.
1. Taking Bank Loans
Bank loans might sound like a valid way to get the money you need to start your business. The process doesn’t take long, and you don’t have to deplete your personal savings accounts or live like a pauper to fund your dreams. However, small business loans can be incredibly expensive, and plenty of start-ups drown in debt before they can even dip their toes in the industry.
While some loans may be beneficial toward building credit and maintaining relationships with financial institutions, there are plenty of alternatives to bank loans that allow businesses to flourish without bogging them down in years of debt. Here are some of the smartest options for small business funding:
- Microloans. If you only need a small amount — less than $50,000 — you can apply for a microloan, which usually comes from nonprofits interested in community building initiatives.
- Merchant cash advances. Unlike banks, these lenders front vast sums and earn it back with a percentage of each sale. Plus, business cash advances are usually distributed without credit checks, which is perfect for entrepreneurs with poor credit.
- Investors. If you are willing to co-own your venture, you can seek out investors who will provide financial backing for a share of your future profits.
- Crowdfunding. The community itself is often an excellent source of funds, especially if your small business is catchy or novel.
2. Disregarding Liability Insurance
Plenty of first-time entrepreneurs are so dazzled by the experience of owning and operating their own business that they fail to understand that their venture might fail. Worse, as it crumbles, it could easily take all of your personal assets with it.
Liability insurance protects your home, valuables, savings accounts, and retirement funds from damage should your new company declare bankruptcy. While it might seem like an unnecessary expense, you should prepare for the worst and work for the best.
3. Spending Unnecessarily
It takes money to make money — every entrepreneur knows this — but that doesn’t mean you have carte blanche for any product or service you have been lusting over. Even after profits start rolling in, probably around the two- or three-year anniversary for successful ventures, you should avoid the temptation to splurge without good reason. For at least the first five years of business, you should be scrimping and saving as much as possible. Every penny you earn should go straight toward sustaining the business, from keeping the lights on to paying off any debts.
4. Ignoring the Bottom Line
In competitive industries, many companies tend to brag to their competitors about their expenditures: “Last quarter, we hired 1,000 new employees” or “This year we expect profits upwards of $5 million.” You must resist the urge to engage in this type of behavior for several reasons.
For one, most entrepreneurs are inflating their numbers to appear more notable than they are. Additionally, by struggling to raise your top-line revenues, you are neglecting to protect your bottom-line assets. Especially in the early stages of business, you should be considering how you can save money, not expend it.
5. Relying on Credit
While you should avoid relishing any debt, experts say that there is an obvious line between good and bad debt. Good debt comes from investments, like a home mortgage, student loans, and small business loans. Bad debt comes from credit cards.
The items you purchase using your credit card — whether or not they are business expenses — will depreciate in value, meaning the interest you pay (which is usually much more than bank loans) increases the amount you paid without increasing the value of the items. You should only use your credit card when you know you have enough to pay off the balance at the end of the month.
6. Denying Debt
When you have debts, you must pay them off. Though this fact may seem self-evident, too many business owners get in the habit of denying their debts and sinking farther and farther into financial chaos. The longer you deny the problem, the stronger and scarier the problem becomes. You and your small business cannot thrive until you pay your debts, and you can’t pay your debts until you understand what they are.