Debt is often used as a form of capital at the beginning of a business. It is not only at the early stages of a business. Sometimes small businesses have to take out short-term loans to cover things like new investments needed or to pay salaries if they are having cash flow problems at a certain month.
Common forms of small business debt include small business loans from traditional lenders such as banks, loans from alternative lenders that can be found online, and corporate credit cards.
Things to know before getting into debt
While small business loans as a form of capital are quite normal (even many successful businesses have some debt), there are some things you need to know before deciding to take out a small business loan.
The last thing you want to do is shoulder the debt and then it will back off. That is why you need to see small business debt as a calculated risk. Here are some things to keep in mind:
Don’t be more indebted than you really need (which means cracking some numbers in advance).
Know exactly what the repayment terms and fee structure are for the form of debt you’ve received. For example, alternative loans have an interest rate equivalent to the interest rate of a credit card, but you usually have to repay it in six or twelve months.
Know what kind of debt you have access to. According to a survey by the National Small Business Association, many business owners think business credit cards are easier to get than a bank loan. If you know you’re not eligible for a traditional loan, look for alternatives.
How much is too much
One question that a lot of business owners question about small business debt is how much it owes. The answers vary by industry, so you may have to do some research to see what is considered normal for your business.
That said, it would be helpful to know what your debt-to-equity ratio is. This can help you determine whether your current sales will be enough to pay the amount you owe and whether you need to make some changes.
All you have to do is divide the total debt by your total equity. So if your equity is $200,000 but you owe $400,000, then your debt-to-equity ratio is two to one. That means you give every dollar you own in the company, you owe $2 to creditors. Not an ideal situation to stay in and shoulder more debt would be a difficult row for a small business. With a larger company, you may notice the value of borrowing more because interest is deducted.
Tips for managing small business debt
The good news about small business debt management is that it is similar to personal debt management – similar concepts apply. The reason for this is that small business debt is often shouldered by the owner. So, although technically “business debt”, it is still your debt.
Here are some strategies to implement when managing small business debt:
If you’re using business credit, try to pay it off each month.
If you own a small business credit card and can’t pay in full, pay more than the minimum.
If you have borrowed a debt, the payments can be fixed. Just pay it just like you would with any other invoice.
If you find your debt-to-equity ratio too high, look for ways to increase revenue so you can repay it more quickly.
When used res accountable, small business debt can help you grow your business. It’s important that you know what you’re entangled in and then how to manage the debt when you’ve burdened it.