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If you have a new business, or you’re planning to start one, chances are strong that you’ll use credit of some sort to get your ideas off the ground. About 40% of all new companies rely upon traditional lenders or credit cards to finance their businesses. In fact, business loans and lines of credit are often essential for any startup company to succeed; after all, you have to make payroll and keep the lights on, even if you don’t have a product or service ready yet. However, debt can be a double-edged sword; it may enable a new company to begin operations, but excessive debt payments can hobble a company later on when cash flow is essential for growth.
It doesn’t have to be that way, though. Young companies can use debt to initiate their operations and avoid the pitfalls that make it difficult to take advantage of fleeting opportunities later on. If done correctly, the use of debt can help your company maintain a solid cash flow and steady growth. Still worried about signing for that new company credit card, or taking out a business loan? Don’t be! Here are five ways you can keep business loans from dragging your company down.
1. Work on Your Credit
One of the best ways to manage your debt effectively is to maintain a good credit rating. If your business has a good rating, it’ll be easier to obtain credit at affordable interest rates. This will help your startup keep debt payments low, so that high debt payments don’t hurt your cash flow later on. If you have good credit, work hard to maintain it. If your credit is less than stellar, strive to improve it as fast as you can. If you’re unsure of your overall credit status, you can order a free report every 12 months (one from each bureau) from annualcreditreport.com to assess your credit standing.
2. Micromanage Your Expenses
Why do startups fail? Well, 29% of all new businesses that go under do so because they simply run out of money. More often than not, excessive debt played a key role in cash flow problems, too. One of the best ways to keep your startup out of financial trouble is to pay close attention to your expenditures. Work hard to monitor every penny your startup spends. Each month, sit down and determine which expenditures were excessive or superfluous, and work to reduce or eliminate them. Monitoring your startup’s spending closely will help you optimize the cash that you do have, and it can help reduce your overall reliance upon debt and credit.
3. Establish Optimal Payment Terms for Your Customers
Don’t let accounts payable become the bane of your company’s existence. If you want to maintain good cash flow and minimize the need for business loans and lines of credit, set payment terms that meet your company’s requirements. If the product or service your company provides requires costly upfront input – such as raw materials or outside contract services – consider requiring a substantial down payment to protect your cash flow. Additionally, work to improve your startup’s invoicing. Use the latest software and techniques, such as texting the invoice, so that your clients know exactly what they owe your company and when. Finally, consider expanding the methods of payment your company is willing to accept for the goods and/or services it provides; the more options your customers have to pay you, the better chance you’ll have of receiving a prompt payment.
Here’s a great video discussing the benefits of establishing different payment terms for your customers:
4. Keep Good Records, Especially of Business Loans
Another good way to help your company avoid debt problems is to establish an effective record-keeping system. Log bills and invoices as soon as you receive them; this will help you keep good visibility of all the expenses you have, especially loan and credit card payments. It’ll also help you pay all your debts on time. Doing so will help your company avoid penalty fees or collections on your outstanding debts, and keep your credit rating in good standing.
5. Get Help
Unless you’re starting a financial service or accounting business, managing finances is probably not your forte. If that’s the case, you should definitely consider getting professional assistance as early as possible to help optimize your company’s finances. Find a trusted accountant who can provide sound advice on subjects such as business loans and cash flow. A good accountant can help you make informed decisions about financing, business loans, and the use of company credit cards. This advice can help your startup take advantage of fleeting opportunities and avoid pitfalls that would otherwise hurt your company before it’s even delivering a product or service.
Startup owners don’t have to fear using debt or credit to get their businesses up and running. Follow these five tips and your company will be able to maintain good cash flow while avoiding the hazards that come with using loans and lines of credit to finance a young company.