Many companies rely heavily on loans and lines of credit for funding. Regular loans can cause debt to slowly build up. If you are not careful, this debt can quickly spiral out of control to the point where you can no longer make your repayments. By taking steps to avoid debt, you can reduce the risk of economic problems in the future. At the very least, you will save money on future interest costs. Below are some ways in which your business can learn to stop taking on debt.
Set yourself a monthly budget
Lots of debt can be the result bad budgeting. Make sure you have a monthly budget to control your expenses. Start by projecting your income. Then calculate the monthly fee you set. After this, make room for some monthly variable costs. Your monthly expenses shouldn’t exceed your income – ideally you should make a profit of 10% after deducting all of your monthly expenses (including salary).
Start saving
You can use your profits to start saving. These savings can be used to pay for unforeseen emergency expenses such as replacing damaged equipment, paying off lawsuits, or fixing business mistakes. If you have a one month unforeseen loss, you can even use your savings to help cover it. Make sure you do not use your savings for emergency expenses. If you have enough profit, you might also consider putting in a little bit of time saving account to save for growth – this lets you one day pay for expenses such as rebranding or expanding your business without having to depend on loans.
Rent equipment if possible
Some types of business equipment are very expensive to buy. Many companies buy this equipment in the finance department. However, you may find that you can stay out of debt by renting this equipment. For example, when looking at a floor cleaning machine, it might be better to consider it floor cleaning machine rental rather than buying a floor cleaning machine. You should only buy equipment on loan if you cannot rent it (such as specialty equipment).
Take out insurance where needed
Insurance can help pay compensation for unforeseen catastrophic expenses such as robberies, cyber attacks, and lawsuits for injuries. This can save you from having to pay money out of your own pocket in the event of a disaster (which normally involves taking out a large loan if you do not have significant savings or insurance). Find out what risks your business is most certainly to face and find an insurance plan that covers them.
Take steps to stop late paying customers
Sometimes business debt is the result of a chain reaction. If your customers do not pay you on time, it can throw off your entire budget, making it impossible to pay your own bills – which then leads to arrears or emergency loans. There are many actions you can take reduce the risk of late paying customers such as credit check customers, offer late payment fees and offer early payment discounts. Make sure you chase down late paying customers as well.
