By Douglas Hoyes
Launching your own business is undeniably an exciting but challenging endeavor. You can expect plenty of surprises as you’re starting out, which is why it’s critical to manage your company finances with as much diligence as possible to avoid accumulating more debt than your business can handle.
Some debt will actually be a good thing for your business, but it is important to treat business debt as an investment that should provide a return, rather than as just another loan. Here are some tips to ensure you manage your business debts wisely when starting a new business enterprise.
Plan ahead for startup costs
One of the most common risks that new business owners make is they don’t start with enough cash to cover their expenses in the early phase. This results in debt accumulation before they even make any money.
It’s critical to have a business plan in place before starting. Determine your costs and how long you think it will take before your business starts to generate some positive cash flow. Prepare for unexpected scenarios, like higher than anticipated expenses and lower sales.
This will help you decide how much capital you need to have available as you launch your new business. Ideally, you should aim to have financing in place for at least your first year of operation. Establish a budget and monitor that budget religiously. Running low on cash can force you to turn to high-cost debt options that are not sustainable.
Be prepared for no salary
With most startups, there is a high chance that you will not be able to pay yourself a salary for at least the first few months or even a year. The problem here becomes how to keep up with both your personal expenses and your business costs.
First, don’t mix personal and business finances. Open separate bank accounts, one for your business and one for yourself. It is even wise to keep these accounts at different banks. If you have a business loan where you bank, your lender may be able to withdraw payment automatically from your bank account by something known as the “right of offset.” Having your personal accounts at a different bank is safer. Related to this, keep business debts separate from personal debts. Apply for a separate credit card for your business to avoid racking up personal debts for business expenses.
It is a good idea to have enough money saved up for your personal life for at least six to eight months, or until your business can throw a little cash your way. If you don’t, you may be forced to rely on personal credit card debt to cover your living costs, adding to your overall debt load. If you do turn to credit card debt, make sure you have a plan to pay it down aggressively when you start earning an income. Debt repayment should come ahead of a better lifestyle.
Remember your tax obligations
Another form of undesirable debt is tax debt. It’s an issue faced by many of my self-employed clients. Unlike when you work for a company where they withhold your income tax contributions and remit them to the government for you, as a self-employed person, those tax contributions become your responsibility. If you have employees or collect sales tax, you are also responsible for remitting these payments when due.
One of the first things small business owners often do when they’re tight on cash is to postpone making their required tax payments. Eventually, this practice will catch up to you, as will the tax man.
Other Articles From AllBusiness.com:
- The Complete 35-Step Guide for Entrepreneurs Starting a Business
- 25 Frequently Asked Questions on Starting a Business
- 50 Questions Angel Investors Will Ask Entrepreneurs
- 17 Key Lessons for Entrepreneurs Starting a Business
Use debt as an investment
While debt is generally viewed as a negative, if used wisely, it can be a great tool for your business—but only if you view it as a strategic tool and not as a way to sustain your company.
Before you borrow, make sure you have a plan. What is going to be the return on the debt you take on? For example, if you are short on cash, but need to make an expensive purchase like a new software program, think before you borrow. Have you done all of your research? Will this new program gives you more in return than what you will be spending on it? Apply the same approach for buying new inventory by making sure you are getting just as much as you’ve calculated you can sell.
Explore different financing options like leasing or receivables financing that allow for more stability than using your line of credit. And always have a business plan that accounts for debt repayment.
Avoid relying on personal assets
As I mentioned at the start, launching your own business is definitely a challenge and sometimes financial hiccups happen. No matter how tempted you might be to tap into your personal assets, such as your home or registered savings, I would strongly urge you to avoid depleting your personal assets to support your business. This is particularly true if your business is struggling. If you feel the need to do this, then it may be wiser to seek help with your existing business debt and learn about ways to consolidate your debt, or if necessary negotiate a restructuring plan.
If you take calculated steps and plan before you borrow, you are more likely to avoid the financial speed bumps that come with debt when starting a new business.