Every small business owner faces many risks when it comes to running a business. From economic, operational, competition or liability –– there are a variety of risks you should plan and be prepared for. There is one risk, in my opinion, that far outweighs any other. So, what is the number one risk to your business?
According to a recent survey, 70% of small businesses have outstanding debt in their business. As many as 64% of those businesses reported struggling financially, with operating expenses and making debt payments being their biggest struggles. Many small businesses start out in debt by getting a business loan (because you need all the things immediately, right?) or they opt for a high-interest rate credit card to purchase start-up items (been there –– done that!).
Here’s the thing. Debt brings risk into your business. When you have accumulated debt, you have to make a certain amount in order to make up for that debt each month. Some months can be a real struggle, especially if your business is seasonal (and you have 6 months of down time.. like me!).
Debt is a Frenemy
An analogy I once heard puts it into perspective: Debt is like a frenemy. A frenemy is essentially someone who pretends to be your friend, but in reality they are your enemy. That is exactly what debt is! It’s an enemy to your dreams and your business goals.
I have a good friend in the creative industry who came to me asking for some financial advice. They were wanting to purchase two Contax 645 cameras –– one as their primary and another as their backup. If you aren’t in the photography industry, these cameras tend to run about $4,500 each! My advice for this person was simple –– save up the money in cash and then purchase when they had the full amount.
This person came back to me last year when the pandemic hit. They confessed they didn’t listen to my advice and put the purchase on a high interest rate credit card. Due to the shut downs, they began losing weddings and sessions, thus, eliminating income they had planned on. Can you guess what happened next?
They weren’t able to make payments, which put them into default. Their loan amount kept increasing due to the high interest rate and their continued missed payments (i.e. penalties). They felt stressed out, couldn’t sleep, and overwhelmed (on top of going through a pandemic!). This whole situation could’ve been avoided if they would’ve waited and paid for their purchase in cash.
Debt Brings Risk To Your Business
Let’s talk interest for a moment, which will make the above story make a bit more sense. The interest that you pay on a loan is considered a penalty. The interest you earn on something, like an investment, is a reward. If you pay interest you are being penalized because you are using someone else’s money. If you earn interest you are being rewarded because you are gaining money from having the money sit. Make’s sense, right?
Debt dramatically increases risk, as many small business owners have learned this past year. If you are just starting out in business do all that you can to not go into debt –– purchase things in cash, buy used equipment, or keep expenses low. Even if you didn’t start debt free, you can get there! Develop a three to five year plan to eliminate debt by allocating a percentage of monthly profits to debt reduction. While you are getting rid of existing debt, create a plan to pay for upcoming large purchases with cash.
Once you pay off all your debt, you are essentially giving your business a raise! Think about what you could do with all that extra money that is no longer going toward a monthly payment! You’ll have more money to pay yourself, purchase new equipment, or build up a savings. You’ll no longer be stressed about how you are going to make the next payment! Doesn’t that sounds great?
Every small business faces a variety of risks, but the number one risk to any business is debt. Don’t let debt rob you from achieving your dreams and business goals! Make smart choices, keep expenses low, and grow your business at the speed of cash. Don’t forget, debt brings risk to your business so it’s best to void it at all costs!
Need help getting your finances in order? Get in touch with me today and let’s chat!