Are you in the process of starting a small business? Maybe you’re already operating one? No matter how confident and passionate you are about your idea, it’s in your best interest to know the facts from the start.
According to the Bureau of Labour Statistics, 50 percent of small businesses fail in their fifth year. Think you’ll be around for at least a decade? You’d be among a select 33 percent.
As grim as those numbers may seem, though—33 percent is still a whole lot of small businesses. And if they can succeed, why can’t you?
Among the many business areas, you’ll need to succeed in, balancing debt is arguably the most important. Because unless you’re already wealthy and looking for a passion project, you’ll need to accrue debt to launch, maintain, and grow your business.
To avoid becoming another small business statistic, let’s talk about taking on debt as a small business.
Research the Best Interest Rates
If you’re in the pre-launch phase of your business, take the time to call around and research the best interest rate you can get on a business loan. It might be tempting to settle for one of the first offers you receive, but that’s a costly mistake. If you have good personal credit and have a solid business plan to share, you should be asking what financial institutions can do for you, not the other way around. After all, you’re giving them your long-term business!
If you’re already operating a business and your interest rates are leaving a bit to be desired, it’s worth the time calling your bank and asking if you can renegotiate to a lower interest rate.
Consolidate Debt
The fewer the debts you’re paying, the less stress you’ll probably feel. Not to mention the less likely you are to lose sight of what you owe and endanger your business. You’re already guaranteed to pay employee wages, rent, distribution costs, insurance and more on a monthly basis—do you really want to add various types of business loans to the equation? If you’ve already made the mistake of taking out too many loans, it might serve you well to consolidate your debt.
You can take a DIY approach, which involves calling around for a larger loan with a lower interest rate, so you can pay off your various balances and only have one payment. Or, if you find that too time-consuming, there are companies that can take the reins for you. This is what financial thought leaders like Andrew Housser and his company, Freedom Financial Network, do.
Be Mindful of Operational Redundancies
Part of being a good business owner is continually optimizing your business for maximum efficiency. It’s the smartest way to maximize revenue and grow the business. Stay mindful of overstaffing your operation, as well as avoiding employee-overlapping roles. The last thing you want as a business owner is to lay off your employees, so think critically about what you need when building out your team. Any additional work that doesn’t warrant another employee should fall on your shoulders. According to a Gallup Poll, 39 percent of small business owners worked over 60 hours a week. You wanted to be your own boss, right?
Maximize the Efficiencies of Your Physical Space
Physical business space is expensive. Are you using yours to its maximum capacity? Repurposing cluttered or repetitive sections of your business space could yield better productivity or uncover a new process that improves your operation. Identifying space, you don’t need could lead to a subletting opportunity and a valuable percentage off your rent.
Improve Margins with Distributors
It’s hard to be successful in business if you don’t have great relationships with your distributors. If your relationship is good but your prices could better, consider asking for a better price on certain goods you commonly order. If your relationship with a distributor isn’t good, use that opportunity to shop around elsewhere for better prices.
Entice Customers with Bulk Discounts
Do you have loyal, repeat customers? It’s hard to grow a business if your only source of revenue is one-off purchases, establish some kind of loyalty program to entice first-time buyers to become long-term customers. Likewise, if you have particular buyers that usually order in bulk, offer price discounts to keep them from continually price shopping around. It’s more important to guarantee future sales than it is to make a better margin on the existing sale.
Maintain a Healthy Debt-to-Income Ratio
At the end of the day, if you’re able to maintain a healthy debt-to-income (DTI) ratio then you won’t need to resort to many of these measures.
Calculate your business’ DTI with this simple formula:
Debt to Income Ratio = (Total Monthly Recurring Debt Payments) / (Total Gross Monthly Income)
So, what’s a good DTI ratio for a small business? There’s no hard-and-fast rule, but generally speaking, a ratio under 1 means you have more stability with your debt while ratios over 1 mean you’re more reliant on your debt.
Not that your small business wants to be reliant on debt, but in some cases, it can fuel growth, allowing you to scale to new levels you wouldn’t have been able to fund on your own.
Every small business is different, the industry outlook, growth goals, amount of overhead and countless other details will all play into the debt you should take on as a small business. Keep the above things in mind though when accumulating debt to make sure you’re staying as lean as possible while remaining committed to your business’ long-term health.
