For many business owners around the world, debt is a fact of life. Revolving debt is often racked up on high ticket purchases from real estate and cars to even daily purchases of gas and food.
At its essence, debt is simply money borrowed by one person from another. By definition, debt doesn’t sound so bad. But accumulating too much debt can put you into a problematic financial situation if you don’t have a plan – especially if you are a young entrepreneur.
If you want to achieve a debt-free lifestyle, here are a few tips to consider.
1. Set a goal to be debt-free
This is an easy one, right? Debt-free living is an attainable goal. If you want to live a debt-free, never lose sight of this goal. Create a plan that is realistic, achievable and relevant to your stage of business and the debt you have incurred to date. Set a deadline for small milestones to work toward your larger goal. Use personal finance apps to track your progress.
2. Minimize business expenses
Without a system to track and manage operational expenses like inventory and advertising, you might make unnecessary purchases that will put you further into debt.
For example, many business owners pay a high cost for carrying excess inventory that ultimately impacts profitability. Use inventory forecasts to anticipate trends to minimize the overstock of unsold products. Review supplier contracts and negotiate terms or look for cheaper suppliers who can deliver on the same quality. Meanwhile, if advertising is a large portion of your budget, ask about volume discounts or promotional offers to help reduce costs.
3. Avoid wasteful spending of time and money
Shiny new objects, like the latest social media tool, are pretty and costly. Always consider the opportunity costs when you make financial decisions for your business.
As the owner, get clarity on the difference business priorities and nice-to-have luxuries. Engage in activities that require you to spend money and time that is beneficial.
4. Rent affordable office space and shared workspaces
Consider your office needs. If your business model allows you to work from home, that’s one cash outlay you don’t have to worry about. However, if you run a business that requires commercial office space, look for shared office space to split the bill with other companies or consider coworking.
Coworking is a great option for small businesses given most spaces offer premium office amenities, flexible memberships with utilities included, building security, office cleaning services and a front desk for members at a fraction of the cost of standard commercial office space rentals. Search for local coworking spaces in your city and sign up for a free tour.
5. Build a cash reserve
Every business should have a cash reserve. This fund will help you take care of emergencies and unexpected drains in cash flow. Build a cash reserve, even if it’s just a small one. Finance experts recommend keeping 6 months or more of business expenses on hand.
6. Don’t overextend yourself
Using other people’s money (OPM) to increase spending power is not an uncommon business practice. But don’t overextend yourself even with productive debt. It’s natural to want to scale and grow, but do it wisely. If you take on financial commitments that are beyond your current capacity to pay or satisfy them, you may need to consolidate.
Talk with a small business accountant to figure out if you are overextended or on that path. Analyze your financial status before taking on small business loans. Understand all of the possible risks associated with carrying more debt. Be informed and maximize on the profits of the business where and when you can.
7. Track everything
Entrepreneurs who live a debt-free lifestyle love to track their personal spending regularly. The same goes for your business. Good money habits which includes monitoring spending, will help you master business finances.
8. Don’t quit your day job too early
As a new entrepreneur, you may want to live on the income from your startup before it is ready to sustain you. Unless your business is a runaway success, don’t quit your day job too soon. You need money to reinvest into your business so it can eventually sustain itself and you.
Many founders don’t pay themselves a salary at first. Regardless of your financial situation, you need to create consistent cash flow. So maintain your primary source of income to reduce the stress placed on your business. Eventually, your business will be able to pay you a well-deserved salary and more.
9. Lead a healthier lifestyle
This should be a no-brainer, seriously. Healthcare expenses can put the most financially secure people straight into unmanageable debt. One trip to the hospital can put a financial strain on you and your business. Investing in your health can save you money.
10. Learn the difference between good debt and bad debt
As a general rule, try not to borrow money or use your business credit cards for high-ticket vacations or purchases that depreciate in value.
However, as the old adage goes, “It takes money to make money.” This best explains the principle of good debt.
Avoid debt that is high cost and isn’t tax-deductible. An example of good debt would include taking out a business loan to finance new opportunities. For example, if you have a purchase order in hand, and lack the resources to fulfill it, a business loan may be a good option. The key to good debt is to borrow in a way that allows you to invest in more sales and create more profit.
Once you’ve determined your business needs, look for a reputable money lender. Bugis Credit, for example, has been offering financial assistance to borrowers for over a decade. When you a find a lender that delivers on hard work and exemplary customer service it slowly makes them a household name in the money lending business, and one you can trust to help you grow yours.