5 Tips For Digging Your Small Business Out of Debt
A vast majority of small businesses fail, and a major contributing factor to this is inefficiently managed debt. While not having debt is almost impossible for new firms, there are some simple methods that can help you evade its crippling effect.
It’s an undisputed fact that many businesses fail – in-fact, the rate of failure within one year of setting up your small business is 20%, which goes up to 30% in the second year, to 50% after five years, and a whopping 70% by the tenth year.
Interestingly enough, nearly 1 out of 3 small businesses fail due to active debt.
To help you make the right financial choices when it comes to establishing your business, we have comprised here five of the most effective tips for getting your firm out of debt, namely-
Reduction in Excess Costs.
Downgrading to Increase Savings.
Prioritizing Debt Payback
Rethinking Use of Credit Cards.
1. Reduction in Excess Costs
Excess costs can be reduced by sticking to a lower budget. Try ordering only enough inventory to cover demands. Additionally, make collection of revenue for the services rendered or products provided (if a customer has not paid upfront) a priority. Doing these will effectively reduce some debt.
Another cost saver is downgrading, be it office building or equipment. Sharing your office space with a partner is an extremely viable and practical decision, at least until the debt is repaid.
2. Downgrading to Increase Savings
Downgrading equipment is just as sensible an idea. Often, downgrading equipment is considered equivalent to purchasing cheaper replacements that wouldn’t last as long. However, reducing active debt is of primary importance, and cheap equipment could be replaced with high quality ones when the debt becomes manageable.
3. Consolidating Loans
Another important consideration is that small businesses with multiple loans should consolidate them. By consolidating multiple loans into one monthly payment, small businesses can refinance the loan and spread it across a longer temporal plane, which would result in smaller monthly payments.
4. Prioritizing Debt Payback
Yet another fruitful method is to pay the debt. There are benefits to both paying back smaller debts first or larger debts first. Paying back a small debt allows business owners to visualize success towards debt elimination. Contrarily, paying off large debts first reduces overall interest that is accumulated.
5. Rethinking The Use of Credit Cards
It might also be a good idea to switch from credit cards to debit cards. The reason that small businesses should use debit cards rather than credit cards is because credit cards create unnecessary involuntary spending. It is smarter to pay with money that a small business actually possesses.
Owning a small business and taking on debt to finance it often go hand-in-hand. Leaving debt unpaid for too long can result in enough interest accumulations to make you bankrupt. It is therefore crucial to know tips and tricks that can help you crawl out of the burdens of debt easily and fast.
Smart use of funds and fund allocations can act as a catalyst for growth. You can induce these tips in your daily transaction activity for developing smart financial habits that go a long way. A balanced approach to personal and business finance has many benefits that you can reap from when the time is right.
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