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If the recent economic downturn has taught business owners anything, it should be that the less debt a company holds, the greater the odds of surviving. Throughout the financial crisis, many leaders learned that the hard way — large debt loads weighed on company balance sheets and had serious implications for the firms that let their borrowing get out of control.[1]

Did you know that more than 50% of small businesses fail within the first five years? One of the main reasons for those failures is the struggle to repay debt. [2]  Business owners who are operating without debt tend to be more responsible and have a greater degree of peace of mind, not to mention a lower degree of risk in the face of economic downturns and declines in business. We find that most business owners feel they need to borrow money to start their business or assist with cash flow difficulties.  This is another area where financial literacy is so important; being financially literate will help business owners devise a plan that will allow them to know if using secured funds to begin their business is best for them. A simple budget can get you off to a great start and maintaining that budget throughout the life of your business will help you to see genuine profit.

Some of my colleagues believe its best to use debt to manage your business to free up cash flow — and while there are some valid arguments in running a business that way, we believe the smartest and most satisfying way to run a business is debt free for 3 main reasons:

Professional Ethic – It is true that a company can run and even thrive when using debt to their advantage (bank loans, credit card, investors etc…). We prefer using these methods once your company is stable enough to ensure these loans and/or investors can be paid back. It’s great to use someone else’s money if you are certain that you won’t end up filing bankruptcy and leaving debts unpaid.

Financial Responsibility – We teach our clients how to become and remain financially responsible. Running a business that does not carry debt in our opinion is one of the best ways to run it.

Peace of Mind – There is nothing better than knowing that you own your business free and clear and that the revenue you earn is true profit. It was once said “do not be owing anybody a single thing except to love one another”. Words to live by!

 

Here is our list of 4 ways to avoid debt:

Consider going to an all cash diet. We are all used to swiping that credit card but it’s just as easy to use your debit card for purchases. This is primarily true for new businesses just starting out. Using a debit card stills allows for the benefit of a statement that keeps track of your business spending with the added security of knowing that when the money is gone the spending comes to a halt until more revenue is available. Overdraft protection can be obtained as a safeguard. This is much better than getting a credit card bill (or worse several) for several thousands of dollars when you are bringing in very little revenue.

Outsource vs. Staffing. Keep cost down by outsourcing projects rather than having a staff that you pay hourly. You can find excellent services from other small businesses that are happy to work within your budget.

Make your living room your office. Depending on your business model it may be advantageous to turn a room within your home into your office. This will greatly reduce expenses such as renting an office or building and paying utilities, internet etc…these expenses add up quickly. In addition, you are able to take advantage of the tax benefits of using a room in your home.

Don’t forget to pay yourself. You do not want to blur the lines between personal expenses and business expenses. Pay yourself a salary and avoid dipping into your business funds. Have specific money that is put back into the business and use this for businesses expenses.

 

So, if you’re looking to start a business consider doing it without borrowing money upfront. Saving up and working on a cash basis won’t be easy but you will be more financially stable in the long run.

 


[1] Moreano, Giovanny; Toscano, Paul (2012, July) 15 Companies with Zero Debt. CNBC.COM. Retrieved Oct. 18, 2013, from http://www.cnbc.com/id/48287071

[2] U.S. Small Business Association

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