5 Strategies for Entrepreneurs to Steer Clear of the Debt Trap It's as hard to avoid borrowing money as it is to make it when you're getting started, but both are possible.
By John Rampton Edited by Dan Bova
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It doesn't matter if you're a college grad, entrepreneur, or full-time employee, you're bound to accumulate debt at some point in your life. While stressing out over debt isn't fun, add that to the already hectic life of an entrepreneur and you could be looking at absolute chaos.
Related: 6 Ways to Dig Out of Debt
Unlike someone with a day job, an entrepreneur can't rely on a consistent paycheck. I personally haven't gotten a steady paycheck for almost six years. Entrepreneurs typically take their resources and put into their startup. I've done this several times in the past. In other words, they're putting money into a business, not towards any sort of debt that they've acquired.
That's why it's of the utmost importance to stay out of debt in the first place. Here are five ways to ensure that happens.
1. Do your homework
Before applying for a loan, make sure you weigh all of your other options. As Daniel Wesley, founder and CEO of Debtconsolidation.com, stated on the OPEN Forum, "Consider whether you'll be able to repay a loan." If you're even just questioning whether you can pay back a loan, look for other options, such as crowdfunding or startup incubators.
Wesley went on to state that you need to do some research and find the right loan for you and your business. He suggests you answer the following questions prior to applying for a loan:
- Is the loan the bank is giving you the right loan for your purpose?
- How will this loan affect your cash flow and budget?
- Does this loan require substantial collateral?
Once you've done all of you research, and have found an acceptable loan you are confident you can pay back, it's time to make your budget.
2. Make a budget and stick to it
Developing a strategy on how to pay back your loan is extremely important, as is figuring out how much you can spend from month to month. This is when a budget comes into play. While you should seek out a professional, you can also follow FreshBooks 5-Step Plan to Creating a Balanced Budget.
- Step 1: Tally your income sources. Figure out how much money you're bringing in each month.
- Step 2: Determine fixed costs. Know which recurring bills you have each month.
- Step 3: Include variable expenses. Don't forget to include items that may fluctuate each month.
- Step 4: Predict one-time spends. While some expenses are unexpected, like replacing a busted laptop, set aside money for one-time expenses, like hiring a copywriter to write a press release.
- Step 5: Pull it all together. Once you've completed the previous four steps, you can then create your budget.
Related: What would be the best way to pay my business debt?
3. Avoid credit cards and other additional debt
If you're trying to avoid debt, don't take on more than you have to. For example, you have a convention or industry event that you're attending and you need some swag for promotional reasons. So, you make up some awesome T-shirts, including a couple hundred to hand out. That would be fine, if it was in your budget, but don't go overboard and have pens, flash drives, iPhone cases or Frisbees made, as well. Those are just additional expenses that you don't have the money for.
Furthermore, you want to avoid credit card debt as much as possible. It's tempting to use that piece of plastic to pay a bill, purchase a new gadget or even fund your startup, but it's additional debt with high interest rates. While credit cards can help you establish credit, and earn perks like travel miles, you should only use them for emergencies or in small doses, like filling up your gas tank.
4. Make some money on the side
While you're waiting for your startup to start making a profit, even if it's just enough to cover your expenses, you might want to start earning a little bit of money on the side. After all, if you don't have any sort of income, how do you expect to stay current on our bills?
This could be something as simple as selling unused items on eBay to launching an affiliate website. However, you may have to take on a second job as a consultant or even working at a 24-hour convenience store. It may be tough for a while, but at least you won't be digging yourself deeper in debt. One of the marks of an entrepreneur is doing whatever it takes to succeed.
5. Consolidate and prioritize your bills
If you're a recent graduate, then you're probably familiar with consolidating your loans. This means instead of paying three or four different companies or debt collectors, you consolidate your loans into one monthly payment, often at a lower interest rate.
However, you don't always have to go this route. You could use the "debt snowball method." As Dave Ramsey explains, this is simply paying off your smallest debt first, which will free up the money to payoff the next debt and so forth. You should be able to pay everything off relatively quickly if you're diligent and responsible.
Another consideration is prioritizing your monthly payments. If things are tight, and you can't pay all of your bills, then you have to make a decision. Which bills are the most important? Taxes and payroll should be at the top of your list, while credit cards should be down towards the bottom.
Whatever it takes, work your hardest to get out and stay out of debt.
