5 Ways To Manage Your Startup Debt

Startup Debt Management

Bringing life to your dream business in this competitive world is exciting, however, at the same time, running that start-up is fraught with risks and challenges. You must deal with multiple challenges and diverse stakeholders while keeping your eye on the larger goal. Everything requires money and which means, you must manage your business finance – effectively!

You need capital for your operating expenses and an appropriate source of funding until you turn your revenues into profits. Once you are sure that you have secured enough finances for your business, you can work to maximize your chances for success.

 

Start-ups generally take 3-5 years to break-even, which implies that you’ll continue to be in debt until the business takes off. Here are five easy ways to manage your debt– and a few warning signs you must bear in mind.

1. Acknowledge the debt and accept it

The most effective approach to manage debt is – do not get overwhelmed, acknowledge that debt exists and prepare to tackle them.

Setting realistic expectations about being in debt, itself takes off some pressure. New business owners already have a lot on their plate to worry about ( like setting up the shop, building their customer base, keeping the investors happy), adding the worries of debt can distract them further from their core task of growing the business.

An experienced entrepreneur and author, Timothy Ferriss says, “It is far more lucrative and fun to leverage your strengths instead of attempting to fix all the chinks in your armor”. Business owners should focus on using their weapons wisely and effectively. Accept that you will be in debt at some stage and for some time, and hence, concentrate on those tasks that shall fetch you profits.

2. Set a budget and try to adhere

A 2016 study in the UK uncovered that about 9% of start-ups did not set a budget – practically, these businesses set themselves up for trouble upfront. Why? Because setting a budget not only means planning your expenditure, but also controlling your costs daily.

Setting a budget means identifying both, setup and operational costs. There will be a fair mix of variable and fixed expenses, such as office space, salaries, utility bills, plant and machinery, consumables, sales and marketing, consultancy, etc. Apply due diligence to ensure you have covered everything and haven’t missed out on any key expense.

Be mindful of the fact that, with relatively weak balance sheets, it is not easy to get loans in the first place. While this can make it difficult for you to get into debt – you can still draw loans from less reputable sources, at a higher rate, though. Avoid the trap by managing your budget well.

Read More: Startup expenses that need to be budgeted.

3. Debt Consolidation

Entrepreneurs often draw loans from multiple sources. While in most cases, a bank loan is a primary source, yet many others rely on credit cards and angel investments. With each additional debt, there are inherent requirements to repay the debtors, with interest and in case of missed payments, with penalties too.

The challenge of managing debts keeps compounding, adding with it, the overhead of accounting and book-keeping.

An effective way to address this problem could be to tie these multiple streams of debts into a single consolidation loan. Debt consolidation is a form of “debt refinancing” that entails taking one loan to pay off many others. It means converging several different repayments cycles into a single consolidated repayment per month – making it easier to track and budget. Depending on the type of loan, you might even get an advantage with the rate of interest.

 

4. Triage your Payments

Another technique of managing your debts is to ‘triage’ your payments. Always bear in mind the fact that, in business, everything is relative. Not all debts are of equal importance – some are essential for the survival of your business, while others are a little more flexible. Prioritizing them suitably can facilitate you manage them better.

Priority debts are those that can seriously hamper your business, if unpaid. Utility bills, rents, taxes, penalties or fines, etc. are such examples. Loans with higher rates of interest will also fall into this category. They might not be large, or at times, may not even appear as debts but they must be paid off on priority. Else, you might face challenges such as loss of power, bankruptcy, or even loss of property.

Lower priority debts are those which can wait until the important ones are covered. Bank loans, credit card payments, overdrafts, etc. are such examples, where you can just pay the minimum amount required and sustain until you reach a stage where you can afford to pay full or more installment. Paying off these small fines will help to reduce pressure. Again, as a word of caution, this must be balanced with intermittent bulk repayments to avoid facing serious consequences. This approach may be adopted as a short-term measure for managing debt.

 

5. Reduce all unnecessary expenses

While this may seem to be the most elementary, intuitive and logical technique, yet, data suggests that start-up businesses often end up losing steam for not being able to efficiently manage their expenses.

While planning your budgets and expenses, you must explore where you can scale back the operations. Look at every expense and figure out what is essential and what can be eliminated. As an example, using open-source software without compromising on product quality or security might be a good alternative to using expensive licensed software. Or buying a second-hand working equipment or even leasing it could be a better option instead of a high cost first-hand one. Flexible working arrangements, co-working office spaces on need-basis, etc. reduce rentals and office overheads. Such thoughtful decision-making leads to the lowering of upfront expenditure and keeping the overall operating costs under check.

 

Conclusion

Every business goes through its cycles of ups and downs and consequent financial challenges. And hence, debt is an inherent part of any business, more so in case of a start-up. Adopting the cost-effective mindset and preparing for the lean periods can help you to manage your debts better. It is also good to hire experts to help your business manage the debts effectively. Connect with TheFilings.in at: 044-46315959

 

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