It’s not uncommon for businesses to go into debt. In fact, according to a study by the U.S. Chamber of Commerce, 40% of small companies have debt. However, what is surprising is how frequently business owners go into debt without understanding why. If you’re a business owner, you must understand why businesses go into debt. Then, you can avoid making the same mistakes.
Underestimating costs
One of the most common reasons businesses go into debt is underestimating their costs. Start-up costs are often higher than expected, and many business owners borrow money to cover those costs. If you’re starting a business, do your research and set aside enough money to cover all of your start-up costs.
Not enough revenue
Another reason businesses go into debt is that they don’t generate enough revenue to cover their costs. This can happen for several reasons, such as miscalculating market demand or overestimating customer spending power. Therefore, making sure your business is generating enough revenue to cover its costs before taking on any debt is essential.
Rapid growth
While rapid growth is usually seen as a good thing, it can also lead businesses into debt. That’s because companies often have to spend money to keep up with that growth when businesses grow quickly. For example, they might have to buy new equipment or hire more staff. If your business grows quickly, ensure you have the financial resources to support that growth.
Poor cash flow management
Cash flow is the lifeblood of any business, and poor cash flow management is one of the most common reasons companies go into debt. Several factors can contribute to poor cash flow management, such as not invoicing customers promptly or not having enough working capital. Therefore, to avoid going into debt, it’s essential to manage your cash flow carefully.
Personal guarantee
A personal guarantee is when a business owner agrees to personally pay back a loan if the business defaults on loan. This may seem like a good idea at the time, but it can put the business owner’s finances at risk if the business defaults on the loan. If possible, avoid taking out loans that require a personal guarantee.
There are many reasons businesses go into debt—such as underestimating start-up costs or not generating enough revenue— but understanding these reasons can help you avoid making the same mistakes yourself. Thankfully, there are also ways you can save your business if you ever find yourself in debt. Consider some of these options.
Debt Consolidation
One of the best ways to deal with your debt is by consolidating them. This involves taking out a new loan to pay off your existing debts. This can be a great option because it often comes with a lower interest rate, saving you money in the long run. Here’s how you can strategically consolidate your debt:
- Look for a consolidation loan: First, you will need to look for a consolidation loan. There are various consolidation loans in the market. Always remember to choose one with a lower interest rate than the overall interest rates of your other loans.
- Calculate your monthly payment: Once you’ve found a consolidation loan, you’ll need to calculate your monthly income. This will help you budget and ensure you can afford the new loan payments.
- Make extra payments: If you can, make additional payments on your consolidation loan. It will help you pay off the debt quicker and save you money in interest.
Refinance
Another option for dealing with your business debt is to refinance it. Refinancing involves taking out a new loan to pay off an existing one. It can be a good option if you find a loan with better terms—such as a lower interest rate. First, you’ll need to find a refinancing loan. Many lenders offer these loans, so shop for the best interest rate and terms. Once you find the right loan, you can start making payments for it. However, remember to space out your expenses. It will help you avoid going into more debt.
Small Business Administration Loan
The SBA is an organization that offers loans to small businesses. These loans have several benefits, including low-interest rates and extended repayment terms. An SBA loan could be a good option if you’re struggling with your business debt.
Asset-Based Lending
Asset-based lending is another option for businesses that are struggling with debt. In this type of lending, companies use their assets—such as invoices or equipment—as collateral for a loan. It can be a good option because it allows businesses to get funding without giving up equity in the company.
There are many options available for businesses that are struggling with debt. You can get your business back on track by choosing the right option. Always remember to calculate your debts first before making a decision. It will ensure that you make the right debt repayment option.
