Every entrepreneur needs ample capital to start a business! It indicates raising money either as Equity or Debt. Most entrepreneurs would have a specific amount of capital to invest in the business. However, that amount might not be sufficient. In most cases, entrepreneurs need extra funding to run and expand the business and cater to day-to-day requirements. It takes close to three to five years for a start-up to come up with profits. Hence, debt is an essential element during such time.
Unlike a salaried person, an entrepreneur doesn’t have monthly earning and can witness trouble in the cash flow. It is essential to manage the cost-effectively and deduct the pointless expenses while expanding the business during this time. Mark Elenowitz shares a few useful ways in which entrepreneurs can manage their debt.
Decide a budget
Assess the budget! It is essential to start planning where you will spend money. It is necessary to have an idea about where the fixed and variable costs will incur. The objective is to minimize pointless costs, recognize the areas that aren’t important for daily business, and cut them down. It is also essential to track the cash cash-flow that’s getting generates. Based on that, entrepreneurs need to decide on the equity and debt funding that they would need. It is necessary to restrict the borrowings. Also, it’s crucial not to overstretch the budget.
The debt cost
A debt brings along with it interest payments! It is essential to know and understand the actual borrowing cost and ensure that you can afford the debt. It is necessary to take on interest payments timely. Any default might hurt the credibility and might lead to a disastrous outcome. Entrepreneurs need to use debt with wisdom by making use of low-interest loans.
They come at a reduced interest rate compared to credit cards and personal loans. Entrepreneurs should look at personal loans as a last resort for funding business requirements. Also, they need to ensure that their equity return is more than debt cost. Else, they will incur a loss. They need to reduce the debt cost while expanding growth.
Prioritize the debt payments
It is necessary to maintain a debt payment list. You need to separate the significant payments and debt, which has more interest. Entrepreneurs should pay off these debts first.
Generate liquid assets
When there is a contingency, it becomes challenging to service debt payments. Hence, it is essential to ensure that there are ample liquid assets to cater to any contingency. Running significant liabilities without sufficient liquid assets isn’t a smart idea.
For every entrepreneur, debt is unavoidable, and it can act as a meaningful tool to start and expand a business when it’s managed well. It is essential to use debt to generate assets to boost income and grow the company instead of taking debt for things that won’t add value. If an entrepreneur fails to make timely payments, the outcome can be challenging and might result in bankruptcy and legal proceedings.