The Secret to Staying out of Debt for Small Businesses

When you have a small business, you should do everything you can to avoid the trap of falling into debt. It’s tempting to take out loans in order to fund growth, but this is a practice that can easily lead to problems. Let’s look at some of the reasons you should stay out of debt and some secrets for avoiding debt.

The Dangers of Debt

Small businesses need capital for many reasons. You may need equipment, employees or a rental space. You may need cash to carry you through the slow periods. For these and other reasons, it’s often tempting to borrow money. One problem is that the same conditions that make you borrow money once can reoccur. Then, you still owe money on the first loan and you’re thinking of another one. This is known as loan stacking and it can quickly lead to a situation where you’re using one loan to pay off another one.

5 Methods of Getting Out of Debt

Be Cautious About Loans
If you do decide that a loan is necessary, don’t jump in without doing plenty of research. Make sure you understand the terms. The actual cost of a loan may not be immediately apparent. Ask the lender for a complete list of charges and fees that may be included. If you’re being approached by aggressive lenders who are tempting you with offers, you should be skeptical. If you’re seeking a loan, shop around and make sure the terms are favorable. Consult with an attorney or accountant to clarify things.

Recruit Investors
If you can find the right investors, you can get the funding you need without taking on debt. There are several ways to go about this. Networking on LinkedIn is a good way to meet potential investors. Don’t overlook people in your current circle of acquaintances, such as friends and family members. When you're seeking an investor, it's important to network in as many ways as possible. Don't be shy about asking for introductions. Your friends, coworkers or social media contacts may not want to invest in your business but they may know someone else who's a potential candidate. Just be weary of why exactly you are making an investor. Barbara Corcoran from Shark Tank says “Make sure you pick good people to build your business with, as they’ll determine 80% of your success.”

Consider Investment Crowdfunding
Another approach worth considering is investment crowdfunding. To be successful with this approach, you need a good pitch and you must be willing to market your campaign. Explore sites such as AngelList, EquityNet and Crowdfunder and see if this is a viable option for you.

Find Cheaper Alternatives
Reducing expenses can help you avoid debt. Many businesses spend far more than is necessary on rental spaces, office furniture, supplies and other expenses. Look for liquidation sales. You can often find used items in perfectly good condition at a fraction of the price of new ones. There may be free or low cost software or services that are alternatives to more expensive choices.

Outsource
Outsourcing is almost always cheaper than hiring employees. You can do this by hiring freelancers or using agencies who charge by the project. This helps you streamline your costs and ensures you're only paying for services you actually need.

Debtor Land Mines
As another “shark” from Shark Tank, Kevin O’Leary, has said, “The road to riches is never straight and narrow. It can be riddled with financial land mines.” One of those land mines is certainly anything that makes up a business’s debt. A bigger land mine, though, is when your creditors start coming after you and you start to lose everything. To help you prepare for something like that, go through a few collection letter samples to see what exactly you’ll be up against. However, it would probably be better for you and your company’s future if you never have to get such a letter.

In some cases, going into debt is a necessary step for growth or even survival. Yet it’s not a step you should take without careful consideration. Decide whether you really need a loan or if there are alternatives. It's good to keep in mind that it’s easier to get into debt than out of it.