Politics and Business
Avoid Taking On Business Debt With These 5 Tips
Many companies rely heavily on loans and lines of credit for funding. Regular borrowing can lead to debt slowly mounting up. If you’re not careful, this debt can soon spiral out of control to a point in which you can no longer keep on top of repayments. By taking steps to avoid debt, you can reduce the risk of financial problems in the future. At the very least, you’ll save money on interest fees in the future. Below are just a few ways in which your business can learn to stop taking on debts.
Set yourself a monthly budget
A lot of debt can be the result of poor budgeting. Make sure that you’ve got a monthly budget in place to control your spending. Start by projecting your revenue. Then work out your set monthly costs. After this, make room for a few monthly variable costs. Your monthly expenses shouldn’t exceed your revenue – ideally you should be making a 10% profit after deducting all your monthly expenses (including wages).
Start building some savings
You can use your profits to start building some savings. These savings could be used to pay for unexpected emergency expenses such as replacing broken equipment, paying off lawsuits or rectifying business mistakes. If you experience an unexpected loss one month, you can also use your savings to help cover this. Make sure that you’re not dipping into your savings for emergency costs. If you have enough profit, you could also consider setting aside a second savings account for saving up for growth – this could allow you to one day afford costs such as rebranding or expanding your business without having to rely on loans.
Rent equipment where possible
Some types of business equipment are very expensive to buy. Many companies buy this equipment on finance. However, you may find that you’re able to avoid debt by renting this equipment. For example, when looking into a floor cleaning machine, it may be better to consider floor cleaning machine rental rather than buying a floor cleaning machine. You should only buy equipment with a loan if you cannot rent it (such as custom equipment).
Take out insurance where needed
Insurance can help to pay compensation for unexpected disaster costs like burglary, cyberattacks and injury lawsuits. It can save you having to pay money out of your own pocket when disaster strikes (which usually involves taking out a big loan if you don’t have significant savings or insurance in place). Work out what the most likely risks your business could face are and find an insurance package that covers these.
Take steps to prevent late-paying customers
Sometimes business debt is the result of a chain reaction. If your customers are not paying you on time, this can throw your whole budget off-course, making it impossible to pay your own bills – which then leads to arrears or emergency loans. There are many measures you can take to reduce the risk of customers paying late such as credit checking customers, offering late payment charges and offering early payment discounts. Make sure that you’re also chasing up customers that do pay late.