How to Avoid getting into debt as an entrepreneur

Wed, Jan 20, 2016

Financial Advice

If you have recently decided to establish yourself as an entrepreneur, you will find yourself in good company in the existing economic climate. After all, this is an increasingly popular endeavour throughout the whole of the developed world, with an estimated 28 million small businesses operating in the U.S. and a record 5.4 million active in the UK.

While you may have been tempted to start your business due to the popularity of entrepreneurship and the potential that it holds in the modern age, however, it is important that you adopt a strategic approach to achieving your goals. This should cover everything from the business model that you adapt to the way in which you scale your venture, while your ability to manage money is also pivotal.

How to Avoid getting into debt as an entrepreneur

More specifically, you must be able to scale and grow your business venture without encumbering unmanageable levels of debt. This can be difficult to achieve (especially in competitive marketplaces), so consider the following steps towards achieving this: –

Making Budgeting and Saving capital a priority

If you were managing your personal finances, there are two key rules you would adhere to at all time. The first is to develop a stringent budget, which helps you to minimise costs and optimise your levels of disposable income. This also enables you to increase the amount that you commit to savings, as your build wealth and create a financial contingency for your future.

While there is a huge difference between personal and professional finances, the same principles can be applied when managing money as an entrepreneur. By minimising operational costs and budgeting your capital, you can increase the spend on strategic expenses such as sales and marketing while also saving a higher percentage of funds for a rainy day.

This also becomes a habit over time, allowing you to save money for the repayment of corporation taxes and legal fees.

Create a model that optimises cash flow

There is an old adage in the small business world which suggests that cash is king, and this may be a good rule to abide by as an entrepreneur. More specifically, you should create a viable business model that optimises the cash flow within your firm, enabling you to comfortably recompense suppliers, partners and employees on time.

To help achieve this, you will need to ensure that all outstanding invoices are repaid within a predetermined period of time, as this generates a consistent supply of income throughout the financial year. If you struggle with this when launching your venture, you may also want to consider factoring (which is a type of debtor finance in which a business sells its accounts receivable to a third party vendor).

Proceed cautiously when pursuing bank loans

While there is nothing wrong with attempting to secure a bank loan in order to fund commercial growth, this is a decision that must be considered carefully before you make a commitment. Credit must also be sourced as part of a viable, long-term growth strategy, while you must also only agree to repayment terms that can be comfortably adhered to.

Remember that once you secure a bank loan, you are instantly placing your company in debt. So unless you are securing finance to scale production and meet confirmed orders, you may want to consider alternative options to ensure that you access the best possible rate and repayment terms. Private investors may be more suitable if you are also in need of specific expertise, for example, while crowdfunding platforms can also deliver funds on more favourable financial terms.

2 Responses to “How to Avoid getting into debt as an entrepreneur”

  1. Tyler Kelly Says:

    As an online entrepreneur, getting into debt is one thing I avoid. It pays to be financially smart, right?
    Tyler Kelly´s last blog post ..Gana Dinero En 2 Minutos Con Programas De Afiliados

    Reply

  2. Laurie Says:

    It is important to go into your business venture smart and go your research. Great information and financial tips – thanks for sharing.

    Reply

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