Debt is quite common in business, but whey people find it trouble is because they are unable to cope up with its pressure and plan properly to get rid of it.
In this article, we are discussing some hot tips for the entrepreneurs to understand the difference between good and bad debts and also to equip one self to get out of debts smartly.
The nature of debts for an entrepreneur
Reiterating the point as entrepreneurs should know the difference between good and bad debts in the first place.
• Good debts are usually in the form of a loan, mortgage, or other lines of credit which can be used for the benefit of the business. These can be alternatively called as productive debts.
• Bad debts, on the other hand, are debts which you cannot actually leverage your business. These can be called as reductive debts. This is money which won’t work for you in any productive manner, but still put the burden on you.
There are basically three reasons why entrepreneurs fall into bad debts:
1. Cash flow fluctuations – It is quite natural for business to have ups and downs in cash flow. When funds are rolling in, it is exhilarating, and you don’t find any trouble. However, many entrepreneurs (especially new) tend to underestimate the dramatic fluctuations in fund flow and don’t foresee the needs of the months or seasons of terrible inflow. Ultimately, one turns into credits to maintain the economic balance. One may feel that these cash advances can be easily paid off, but many fails to do it and ultimately fall into the bad debt crisis.
2. Putting more pressure on the business – Sometimes, entrepreneurs will start to overspend for their personal expenses out of business before the even proper establishment of their business. They may quit their existing day job and try to build their business, but never realize that they are still not ready to pay the monthly salary they which one needs to live on. In fact, any business needs to time to mature and also demands reinvestments to nourish. Above this, businesses also require reserves too to meet up with inconsistent cash flow.
3. Overconfidence – Many new entrepreneurs may be using the productive debts for non-productive purposes and think they are doing it wisely. However, they are actually over-extending, and it typically goes wrong over time. Recession or economic crises may pop up at, and the situation easily snowballs out of one’s control and entrepreneurs ultimately fall under the risk of losing everything.
Staying off the debt
As we all know, the best possible way is to stay out of debt is to avoid falling into such bad debts with proper financial practices. This necessitates proper planning in advance and also a proper insight to business administration. Here, we will discuss some of the baseline business practices as advised by nationaldebtreliefprograms.com experts, which will help entrepreneurs to stay off troublesome debts.1. Minimize your expenses. It is okay to be frugal even when you are a businessman. You read any random business success stories, and you will find proofs to justify it.2. Hire employees only when sales come to your door and when you can afford it. It is not ideal to do it in advance by hoping for the growth.3. Avoid wasteful spending of even a penny and also consider the opportunity costs while making financial decisions.4. Don’t overextend yourself on any productive debt. It is advisable to grow as much on own profit of the business.5. Always keep cash reserves to meet up the emergencies and also the potential financial downturns in the business.
Setting a Debt Snowball to get rid out of bad debts
If you are aiming at long-term success, it is essential to eradicate the reductive debts out of your business and life as soon as possible. For this, implementing a bad debt snowball is important. A proper strategy with the help of a spreadsheet and analysis can help to fast-track entrepreneurs to get out of debt faster than they can imagine.
The concept behind debt snowball is very simple1. Create an action plan in light of the debt situation.2. Stick to it.3. Get out of it and celebrate success.
At the first point, one should first understand the debt situation in full and decide how much of the monthly revenue can be rerouted to eliminate the reductive debts. This needed to be done in a balanced way as with a larger debt; one needs to commit as much as possible. The amount you are going to commit for debt elimination has to stretch you really.
At the next stage, make a list of all the reductive debts in order of criticality and begin with the largest debt first and ending with the smallest one. Make sure that you note down the minimum payment of each debt too.
Once if you have this blueprint, stick to its proper implementation as by simply putting the money committed to your debt plan every month. Try to add some extra cash into the payment of the smallest debt and continue to make the minimum required for other remaining ones. Soon, you will see one out of the list getting eliminated.
Now, the snowball increases in size and the money you committed to the smallest debt get applied to the next larger one. Continue making this increased payment to the debt until it ultimately gets eliminated. The process is repeated over and again for months or years before you clear off all your bad debts.
Being an entrepreneur is obviously a matter of pride and self-esteem, but when you find yourself in a bad situation with overwhelming debts working against your interests, it is essential to act quickly and start working on it than waiting until it gets you into neck-deep waters.
There are many agencies and consultants too to help businesses in terms of debt handling and a proper debt management plan in place will help eradicate the problems to a big extent. Remember staying out of bad debt does not imply a reactionary measure, but it should be made a part of all successful business operational plans.
Marina Thomas is a marketing and communication expert. She also serves as a content developer with many years of experience. She helps clients in long-term wealth plans. She has previously covered an extensive range of topics in her posts, including business debt consolidation and start-ups.