Startup owners are usually an extremely worried lot; not only do they have to plan ahead for multiple things but also need to worry about raining the funds to keep the business going after their own savings have been used up. Often it is the worry about money that keeps many potential entrepreneurs from launching a potentially lucrative business. A few months down the line when it is time to make the business grow with the additional infusion of funds, entrepreneurs generally have to resort to credit card financing or small business loans. As the business grows, it can be more difficult to cater to the increasing needs for funds and indeed lack of adequate funds is the second most common reason for business failure after lack of market potential. If you do not want financial disaster overtaking you, you need to manage your debt really well. Some tips that can prevent you from running a successful enterprise and becoming a millionaire:
Do the Math before Taking on Debt
It may well be stating the obvious but you should only consider taking a loan when you have the ability to pay it back. Because most business owners do not bother doing their homework, it comes as a surprise to them that the cash flow has not increased by the extent that the additional debt servicing requires. Before you apply for a loan, it can be worth the while to calculate the debt coverage ratio, which is exactly what the lender will also be doing. The debt coverage is arrived at by dividing the net operating income by the total of the principal and interest accrued on the loan. While calculating it on a monthly basis will give you a better picture of the health of your cash flow, it will satisfy most lenders if the debt coverage ratio meets their benchmarks on an annual basis. A lender will generally look at a minimum of 1.15 coverage ratio for approving a loan. If you do not meet the qualifying mark, you may need to scale down the loan amount or try to increase the cash flow substantially. Staying within the safe parameters of the debt coverage ratio will give you the peace of mind that your business can meet its debt servicing obligations and not have to divert money from other essential activities to repay the debt.
Boost the Cash Flow of the Business
While debt is necessary for surviving the initial years of entrepreneurial hardship, you should look at making your cash flow so robust that you do not need to take out loans anymore. Strong cash flow will enable you to repay the existing loans and credit card dues at the earliest so that you can save on the interest expense and focus your entire resources on butting your business on a higher growth path. According to https://www.forbes.com, building up your cash flow when the times are good will let your business survive the times when there is a downturn. The three main ways of increasing cash flows are:
Boosting productivity: The cash flow can be increased by making your operational processes more efficient and by finding new revenue generation streams. Typically, you will be able to either achieve these by introducing new technology or by upgrading the skill set of your employees. The profits may also be boosted by raising the product prices, entering new sales territories, or employing new marketing channels. You may need to make investments for these to happen, however, depending on the circumstances and opportunities; you may not need to take on extra debt for too long a time to make them a reality.
Consolidate Your Debts
If you have taken a number of loans as well as used multiple credit cards to finance your business, it is quite likely that you will be having trouble in monitoring them and making the payments on the due dates. Missing payment dates attract penalties and extra interest that you can ill afford when you are trying to run a lean organization. Consolidating all your debts with the help of a professional company like nationaldebtreliefprograms.com can save you a lot of hassle, as you will end up with only one loan to service with only one monthly payment. Furthermore, you will typically, end up saving a lot on the interest expense as there is usually a huge difference between the interest rates charged by credit cards and private lenders. Availing of a balance transfer offer by a credit card can be a wonderful opportunity for saving on interest as the new card will normally allow you a zero-percent rate of interest for 18-24 months that you can use to repay the all the dues. However, be sure to check out the fees and charges associated with the balance transfer facility and ask for a waiver, as they can be quite steep.
Renegotiate Terms with Bankers, Vendors, and Key Customers
It is possible to take the stress off the cash flow by properly managing the accounts payable. Try and extend the credit period given by your vendors to the maximum, so that you can realize your sales within it and pay them from the proceeds. Alternatively, you can promise to pay them earlier if they give you an attractive discount. Be aggressive with your vendor negotiations and always be on the lookout for new suppliers although be sure to check their credential first before typing up with them. Minimizing your inventory with just-in-time inventory management system can also free up a lot of cash tied down unnecessarily at present. Even key customers can be encouraged to pay their invoices earlier with discounts.
You can make your business thrive by constantly looking at how you can make it more operationally productive. Use every method known to you to boost the cash flow so that you can build your own reserves and use it to power your business ahead without taking on debt. If you do need to take on debt to grow faster, you should do all the calculations of the debt coverage ratio and take on the minimum loan that you need. Get rid of all retail loans because they carry a really high rate of interest and tend to bleed your enterprise.