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Managing Debt

Erasing the word “debt” by a eraser.

You’ve likely heard the motto, “You have to spend money to make money”. And it’s a true statement. For businesses to grow and thrive, it’s necessary for us to acquire some debt. Unfortunately, that debt can pile up. While most business owners know, they will likely not see a profit for as much as five years, digging yourself a hole might make that time-frame longer, if at all. Managing your debt is vital to the health of your business and, ultimately, your life.

  • Be aware of your debt to income ratio. There will be times, especially in the first few years of your business, that you spend more than you profit. This is to be expected as you get your company off the ground. However, it’s still important to keep expenses manageable to what is coming in.
  • You may need to obtain capital from a lender at one time or another. There’s nothing wrong with borrowing money if it’s going to make you money. The thing you want to be wary of though, is accepting offers that are too lofty. Sure, it’s a pleasant surprise when you’re approved for $100,000 when you only expected or asked for half that amount. Sadly, some lenders and credit card companies don’t give realistic approvals on what you can afford. The result is you being over-extended and overwhelmed. A more conservative offer may not be a bad thing. It allows you to follow through with business plans and not give you the stress of how you’re going to make the payments. You can always obtain additional cash later as you need it.
  • As you receive offers for funding, ask if there are early pay discounts. In addition, ask if you there are early pay penalties. Should you do better than expected, you could save some dough paying the loan off early.
  • Use good accounting software or hire a trusted accountant. The only way to know accurately your debt to income ratio is to keep good records. An accountant is recommended more so than doing it yourself as it is very time consuming. But if you insist on doing it yourself, invest in a top-rated accounting program.
  • Stay current with all creditors. This will be easier if you’re not over-extending your budget. However, tough times fall upon us all. During those times, do not skip payments! Calling a creditor to make payment arrangements is always better than just not paying. You’ll kiss any chance of ever receiving capital again goodbye.
  • Pay extra on principle to credit cards that have the highest interest rates. Paying those high interest cards off first will save you big in the long run. Should you receive offers from competing credit card companies, take advantage. You may be able to transfer your high balance to a lower interest card or at least have negotiating power.
  • Form a corporation or LLC instead of staying sole prop or partnership. There are advantages to being a sole prop or partnership, of course. They cost less to establish and aren’t liable to pay unemployment taxes. On the other hand, corporations and LLC save you money on self-employment taxes. Furthermore, shareholders in a corporation usually aren’t liable for corporate debts, saving your personal assets.
  • Increase your sales. I know… this is a no brainer. Who doesn’t want to increase their sales. It’s obvious that upping your sales would increase your profit margin. Perhaps looking at your current sales techniques, such as suggestive selling and placement, would be in order. Take suggestions from the people that are on the “front lines”. They may have ideas of new and inventive ways to raise your sales.
  • In direct relation to increasing your sales, is paying attention to what doesn’t. Be in tune to what your customers want, need and BUY. You may be wasting precious cash on items that are simply collecting dust.
  • Check in regularly for the best deals with vendors. If you’re a long-time customer with your distributor, remind them of that. There’s nothing wrong with asking for discounts for your loyalty and business. Of course, be reasonable. The distributors are running a business too. It may also be worthwhile to do some comparison shopping. Just don’t sacrifice price for service and quality.

The bottom line is not to be afraid to invest in your business. Putting money into your business is necessary. Just be mindful that the funds are making you money and turning you a profit.

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