Starting and maintaining a small business on your own is no joke. It needs a lot of planning, delicate execution, people management, and raising funds from time to time as well. And raising funds means debt financing. However, your startup may not make enough to pay off the debts, risking possible bankruptcy and perhaps even liquidation.
What can you do if you want to avoid hiccups when your startup fails to finance your debts? Maybe not all is gone, and you can retrieve something.
From managing your spending to considering liquidating your business, here are six tips you can follow if your startup cannot finance your debt repayments.
1. Have a Steady Income Source
In the early days of your startup business, you must have a steady income source. Why, may you ask?
A full-time job guarantees a steady source of income. If you have a permanent job placement, you can use the income from that job to not just finance your startup business, but also to pay off your debts.
It’s a general rule that you shouldn’t leave your full-time job until you’re sure that your startup has taken off well. And if you want your startup to finance all your debts, then don’t leave your full-time job until you’re sure that your startup brings more profit than what you earn from the job.
2. Consider Voluntary Liquidation
You can opt for liquidating the startup when you’ve exhausted every possible way to save your business and don’t see any way out of the debt. You can also take this step when you feel like you can’t keep up with the piling debts anymore or you’re not making enough to repay the debts.
In such cases, you should apply for liquidation by yourself before the court forces you to do so. You’ll basically be ending your startup by distributing its assets to the claimants. It’ll help to prevent your loans from getting out of hand too.
If you live in the UK and have a startup that has become insolvent, you can reach out to voluntary liquidation experts such as Clarke Bell, who help small and medium-sized companies. You can get a CVL Quote from Clarke Bell to help close down your insolvent business.
3. Prioritize Your Debts
When planning to start a startup business, it’s only natural that your income may not be enough to finance your plan. This means you have to take different types of loans from various sources, each with its repayment period.
Not all loans require collateral. You can also get unsecured loans, where the bank will only take your signature as a guarantee of your loan repayment.
So, how should you prioritize your debt repayment so that you don’t have to face the pressure of paying all at once? You can start paying off more than the minimum amount more than once a month or start paying off the highest loan. You can also follow the snowball method.
Let’s look at some of the loans you can apply for, the options for paying off your debt, and also talk about the snowball method.
Revise Your Loan Term
If you think you need more time to repay your loan, consider refinancing your debt to a longer loan term. This will not just give you more time to pay it all off but also bring down the amount you need to repay every month.
However, you may need to pay more interest overall if you extend your payoff term. If you want to avoid that, you can refinance your loan to a lower interest rate but with the same length as the original term. The lender may have other conditions, so you should decide carefully.
Consolidate the Loans
Another thing you can consider is consolidating your loans into one new loan. If you took multiple loans that have high-interest rates, then consolidating them all into a new loan will lower your interest rate.
You’ll have to pay less every month and can also pay more than once every month. You’ll also have fewer bills to pay while improving your credit score.
But how does it really work? Before you start applying for it, you need to calculate your existing loans. If the bank approves your application for the new loan, you’ll receive loan funds to pay off your current debts before you can start paying off your new loan every month.
The Snowball method may be one of the best strategies to work with if you struggle to repay the debt. What is this method? And how does it work?
Basically, you start by paying off your smallest loans with a shorter term. It’s better if these are loans with collateral. If you plan on paying off secured loans later, you may lose your collateral if you don’t repay within the specific loan term.
Doing this will not just help you take some weight off of your shoulders but will also make you more confident. You’ll also be able to build more capital with your business and save more from your full-time salary to start paying off the high-interest loans soon.
4. Revise the Budget
Anytime anyone starts a business, they need to make a budget first. A lot will depend on this budgeting, such as the profit you’ll make, the percentage of discounts you can give on your products and services, the equipment and workforce you need, your fixed income, etc.
Besides, you’ll need a fallback plan for emergency expenses, determine the costs that you’ll have to bear every month, and a plan for anything you need to invest in. This requires extensive planning and revision of the items, as you can get similar things at much lower costs.
If your startup is product-based, then you have the scope to revise your budget. You can get software that carries out the same functions for much less payment. Besides, you can cut down on the costs that you deem as unnecessary.
And if it’s a service-based startup, then you need to figure out which software will be more worth the cost and how many employees you really need. Besides, see if you can do some of the work without the help of others. This will help cut down costs further.
5. Cut Down Credit Card Spendings
It may seem more convenient to buy for your business using a credit card. However, because of how credit card functions, they’ll simply build a bigger pile on your already existing debt.
Basically, the bank from which you took the credit card will credit you a specific amount which you need to pay back every month, hence the name. With these, you need to pay a minimum amount every month within the due date.
If you somehow fail to do that, then the bank will charge you interest, and credit card interest rates are pretty high.
Credit cards also often come with various offers telling you how spending a specific amount on something can increase your credit score. These offers are very lucrative, which may make you spend on things that you don’t need.
See how paying with credit cards can pile up interest amounts and more debt for your startup?
6. Manage Your Expenses
A great small business money-saving tip is to reduce your expenses and divert them to better use. You should practice living below your means and take that philosophy to running your startup as well. That way, you will have enough savings to pay off the debts even when your business is going through a bad patch.
Try making a list of the things that you absolutely need and a list of things that you want but don’t need them. Keep the ‘needs’ list only, which will help you cut down a major amount of unnecessary spending. This will also help you save up for debt repayment.
Let’s talk about reducing costs on business. Instead of employing people for every department of your business, you can outsource some activities to freelancers. You can also get second-hand supplies and equipment, which will oftentimes be in good condition and will cost you much less.
Also, try focusing on boosting productivity. You’ll be able to achieve more in a shorter period than you used to do. You can also take the help of social media as a means of low-cost marketing.
Running and managing startups is a tricky business, especially when they’re still in their early phases. If your startup still doesn’t earn enough to help you pay your loans back, then these tips can help your startup to survive the roller-coaster ride. We hope that, by following these tips, you can save your startup and repay your debts properly.