Last year, 43% of new companies applied for a loan to finance their businesses. If you have a new business, or you’re planning to start one, chances are good that you’ll use credit of some sort to get your ideas off the ground. The fact is business loans and lines of credit are often essential for any startup company to succeed. After all, you must make payroll and keep the lights on, even if you don’t have a product or service ready to sell.
However, business 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 when cash flow is essential for growth. But it doesn’t have to be this way.
Young companies can use debt to initiate their operations and avoid the pitfalls that prevent you from jumping on future opportunities. 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 four ways to keep them from dragging your company down.
1. Micromanage Your Expenses
In 2022, 44% of failed startups went under due to cash shortages. So, why do startups fail? Excessive debt and poor financial planning play a key role. One of the best ways to keep your startup out of financial trouble is to pay close attention to your expenditures. They play 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 on debt and credit.
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2. 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 your clients know exactly what they owe you 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 will have of receiving prompt payment.
3. Keep Good Records, Especially of Business Loans
Another way to help your company avoid debt issues is to establish an effective record-keeping system. When you receive bills and invoices, log them immediately to keep good visibility of all the expenses you have, especially loan and credit card payments. This will also help you pay all your debts on time, which can help your company avoid penalty fees or collections on your company’s outstanding debts.
4. Seek Help From an Accountant
If managing finances is not your forte, you should strongly consider seeking professional assistance 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 skilled 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 could otherwise hurt your company immediately.
Startup owners don’t have to fear using debt or credit to get their businesses up and running. Follow these four tips to help maintain good cash flow while avoiding the hazards that come with using loans and lines of credit to finance a young company.