Strategies to Successfully Manage Small Business Debt

Strategies to Successfully Manage Small Business Debt

One of the most common reasons that small businesses fail within the first two to three years is that owners fail to set aside enough money for startup costs because they underestimate how much they will need. When you add this to the fact that it can take a while to turn a profit, it’s easy to see just how starting a small business can make you incur a lot of debt. This can cause you to turn to credit cards and loans to meet those early expenses, which can quickly spiral to owing more than you can afford to repay.

Make a Realistic Plan for Start-up Expenses

You have a chance to do things differently if you’re in the early stages of launching your business by taking the time to create a realistic business plan. Make a list of your anticipated costs as well as a prediction for how long you think it will take your business to generate positive cash flow. Don’t forget to include some cushioning for unexpected costs such as severe weather recovery and for seasonal sales differences.

We recommend that you overestimate your startup costs to ensure that you don’t go into debt. Ideally, you should have enough cash available to meet expenses for one year before officially launching your business. Be sure to create a monthly budget and adjust it if needed. You will likely do this more in the first year as you become accustomed to routine ebbs and flows in your business income and expenses. This will become less crucial after you have more experience as a business owner. Additionally, keep in mind that you may not have enough income to pay yourself for several months and operate accordingly.

Never Mix Business and Personal Finances

It’s tempting to lump your business and personal finances together, especially when you’re starting small. However, it can seriously complicate things later if you don’t separate your checking, savings, credit card, or loan accounts. You can still transfer funds from one bank account to another but don’t initiate personal payments from your business account and vice versa. You may even want to keep your business and personal accounts at separate banks to prevent the bank from automatically withdrawing money from one of your accounts to meet a debt payment.

Make Tax Payments a Part of Your Budget

When you worked for an employer, that company took care of remitting the taxes you owe from your paycheck to federal and state governments. It’s all on you as a self-employed individual. At a minimum, you need to make estimated federal and state tax payments on January 15, April 15, June 15, and September 15 each year. If you have employees or collect sales tax, you will need to make those payments as well. Failing to remit them on time because you don’t have the funds will only cost you more in penalties and interest, so make sure you budget for them from the start.

If you’re struggling with business debt, don’t hesitate to reach out to Lowcountry Business Advisors in Greater Charleston, SC for additional management strategies.   We are small business consultants who strives to use our experience and passion to help business owners achieve their goals.  Let’s meet for coffee and see how we can work together.