Starting a business as an entrepreneur is a tricky business, especially if you do not have enough funds to get your business started and keep it going while you try to earn enough to be self-sustaining. Unfortunately, if you go too deeply in debt, you may find it hard to stabilize your business and make a breakthrough.
To prevent this from happening, entrepreneurs must learn and understand the difference between good debts and bad debts and how they could maintain their business afloat without going into debt.
If you are an entrepreneur, here are the things you should know and help you with your debt.
Good debt Vs. Bad Debt
If you take out personal loans from a moneylender or other forms of credit like secured loans or credit cards for the benefit of your business, these credits are known as good debts. The money you get out of these loans can be used to develop your business’ assets and value.
Bad debt, on the other hand, is acquired if you take out any financial product or credit that will not be used for the business in any way. It can also be any purchase done through credit which is over the amount you could pay on time.
Why do entrepreneurs end up getting bad debts?
There are three major reasons why entrepreneurs end up with bad debt and what you should do when it occurs.
- Your company’s performance is still unstable, causing your revenue to be unstable.
Every startup business gets to this point when their income is not the same every month. When this happens, you must have a backup plan on how to pay your bills on time and without problems because you may find it difficult to get your debts sorted out in the long run. Do not hold off payments as much as possible and pay them immediately so you won’t have problems once the next month comes.
- You do not have an extra fund source.
While your business is still picking up its pace and do not generate regular income every month, you will need to have a backup fund source to pay your workers, your production and other bills. You should not press your business to make what it could because you will need to give it time to pick up a working trend to get everything established. Try putting in more profits so your company can sort out its operations and help it become self-sustaining.
- You are overconfident with your revenue.
When your company gets its first pay cycle, do not immediately jump in a large project or expansion and use the money. You may think it is a productive debt to help the business when you get the funds, but you may find yourself under heavy debt. Plan your expansion project thoroughly and sort out the things you need to pay first.
How to Get Out of Bad Debt?
If you find your company in a bad debt situation, you must act upon it as fast as possible. Bad debt can start your company’s decline and may put you more in debt.
You can start by utilizing a debt reduction plan that would help you get rid of all the expenses you do not need for your company. Just like fat in one’s body, there are areas in your company where you can reduce expenses.
When you get some funds, use the money to help reduce these bad debts and try to use the money to improve your company’s performance. It may take a lot of work, true, but with a little patience and dedication, you can help reduce the debt your company has and focus on what is important.
Once you pay off one expense, use the money you allotted for that expense to pay off the next one until you pay everything. You can begin with the smaller debts and work your way to the larger debts. If one debt has large interest rates, go pay them first.
You can also approach moneylenders and get a personal loan to help you with the bills you need to pay immediately while your company is stabilizing its revenue and operations. Moneylenders can offer flexible personal loans that would match your needs and you do not have to worry about paying it immediately. You can even consolidate all your debts into one personal loan which has a low-interest rate, effectively helping you reduce your monthly repayments altogether.
Of course, before you approach a moneylender, you must do your research on the available loans you can use for your expenses and approach only licensed moneylenders. To check which moneylender is approved by the government, you can check out the website of Singapore’s Ministry of Law for more details.
When you manage to get out of all your bad debts, you can celebrate a little because you finally have gotten your company out of the perils of financial trouble. Since you do not have any bad debts left, you can now use the money to reinvest back into your business and help it grow. If you want to give yourself a little incentive to work harder, you can use the freed money as a salary. If your business is just maturing, it is ideal that you use the money you used to use for bad debts to develop your business and just save the others for emergency expenses.
Bad debts can be avoided if you know what to avoid and if you apply sound and practical business plans to your company. When you get funds from your revenues and your other income sources, let your business grow at a reasonable speed and do not force it to expand. When you see regular revenues and results for a long period without fail, you can then turn your attention into expansion and breathe more easily now that your company is financially stable.
If you need to get a business loan, you can find out more here!