Debt is not always bad. There is a good debt that is necessary to survive and thrive when starting a new business. Many startups and SMBs are able to grow because of the good debt. But the problem arises when you are unable to pay it back so far and it starts to harm the overall financial health of your business. Running a totally debt-free business might not be possible but there are some strategies you can avoid getting into debt when starting a business.
Below are some ways you should try to reduce and avoid business debt as much as possible.
Everything is better with a business budget
Budgeting is the best way to track where your business money is going and where you can afford to spend it for increased revenues. Effective business budgeting helps with both business planning and control of the finances of the business. If you don’t have good control over expenses, planning is useless. And if there is no planning, there will be no identified business objectives to achieve. Creating a budget plan also helps you avoid useless expenses to increase the bottom line.
Right after creating a budget plan, have a look at your operating expenses. Check if you have any excess costs you can run a business without, avoid them. Decide on which operations and services are important to keep your business processes running smoothly and spend business money on them. You can also use your previous financial reports to see overheads that are contributing to debt instead of business growth. Cut them off to increase your cash flow and avoid debt at all.
Pay off your credit card balance in full
Getting a business credit card is the best way to meet the financial needs of your business without using cash. Not only this, you can also enjoy other financial perks and benefits like a welcome bonus, cashback, 0% introductory APR on balance transfer and free reward points, etc. However, you should pay your credit card balance in full every month to earn good credit scores and avoid building debt. Try to use as little of the available credit limit as possible and pay the balance in full every month before the due date. If there is a large balance on one of your business credit cards, then moving the balance of the current card to a new card with a lower or no interest rate could be a good move. In this way, you can pay off your credit card debt easily without paying interest.
Take on new debt strategically
Getting a debt can be a positive decision if it will push your startup toward its financial objectives. For instance, if you need some finances to purchase a new machine that will double your production, you should opt for a business loan on better terms to speed up your production performance. When there will be a boost in production, your sales will increase as well and you will be able to pay off the debt faster. However, you must create a proper repayment plan and shop around for a loan on a lower interest rate to save the business money in terms of interest payment.
Build good credit
Credit scores are a criteria banks and financial institutions use to check your trustworthiness for paying off the debt on time. A business with good credit scores can easily get its loan application approved. Furthermore, companies with good credit scores can also get loans on better terms and at lower interest rates. This is the reason, you should build good credit scores to make your way towards an easy business loan whenever needed. Getting a business credit card, paying bills on time, and using little portion of the available credit limit are some of the best ways to build good credit scores. You should also review your credit rating reports for flaws and get them fixed as soon as possible if any.
Debt is an important aspect of running a business unless you are rich and can self-fund everything to start and run the business effectively. But business debt does need to be managed and paid down according to the agreed terms. Above mentioned strategies can help you reduce and avoid debt when starting a new business so you can run a debt-free business.