Managing debt: how to avoid a financial catastrophe in your small business.
Author | Stewart, Heather |
Position | EntrepreneurEdqe |
It's hard, if not impossible, to launch or grow a business without taking on some debt. Indeed, debt is not something to be avoided. Instead, it's something to be carefully managed and deployed strategically.
John Kane, a CPA with Cook Martin Poulson, PC, says business owners should watch out for several pitfalls when taking on debt. Here are some of his dos and don'ts for managing debt:
Do your homework
"Make sure you know your business," says Kane. "Know your numbers." In other words, figure out how much revenue your business will need to generate each day in order to, at a minimum, cover expenses, including debt payments. How much will you need in daily, weekly and monthly sales?
Do shop around
Different lending institutions offer different products with different rates and terms. Shop around to find the product that best suits your business's needs.
Don't relax thrifty habits
For many newly minted business owners, cash is very tight. When they're first starting out, says Kane, they "squeeze every dollar" to make it stretch as far as possible. But all too often, that caution is thrown to the wind once they receive a line of credit. Kane's advice is to hold to those penny-pinching habits, even when more money is available to you.
[ILLUSTRATION OMITTED]
When business owners use up their line of credit fast, and they're only making the minimum monthly payments on the loan, "that can get scary fast," says Kane. Once that credit is used up, there is no buffer for unexpected expenses or emergencies--but those monthly payments will continue to come due.
Don't fritter cash away
Credit should be used for specific, long-term needs, says Kane--things like buying or expanding a building, purchasing...
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