How To Grow A Debt Free Business

Guest Post: Victoria Lawes

Every entrepreneur faces the most difficult challenge when starting a business and that’s effectively managing finances. Trying to run a debt-free business is no easy task, but it’s possible if you plan everything out in advance and prepare for every obstacle that may come your way. This sounds a lot easier than it actually is, especially because running a business can get quite unpredictable. Things may get quite difficult for startup businesses that have a limited budget to develop an MVP (minimum viable product) and successfully launch their business on the market before they run out of funds.

Nowadays, there are virtually no startups or small businesses that are debt-free. That’s mostly because a lot of business owners prefer a more aggressive approach to business growth, such as taking big loans to develop products or services as fast as possible and storm the market before their competition does. However, that’s also one of the main reasons why so many businesses fail in the first place.

Without a financial plan, you either go for it and hope for the best or fail and drown in debt due to an uncalculated risk. Nevertheless, is there really a way to run a debt-free business? The answer is yes, although it’s very difficult and it demands a lot of planning and sacrifice. Here are a few tips that can get you on the right path.

Carefully plan ahead

Every business revolves around a certain idea. If that idea will sell on the market, your business will be successful. However, there are a lot of factors to consider first, before you reach a solid conclusion. For instance, does your idea involve some sort of product or service, or both as your business foundation? If it does, will that product or service be helpful to your customers in any way? Also, will there be enough demand for your products or services on the market for you to establish a good revenue?

These are just some of the most important questions you have to answer if you ever want to get a clear picture about how much it will cost you to turn your idea into a profitable career, without going in debt. One of the best ways to achieve this is to conduct a thorough and in-depth market research.

As for the small businesses that are already operational, you should always have a clear financial picture about your future endeavors, such as growing or scaling your business, introducing a new product or additional features for the existing ones, future marketing campaigns, etc. That way, you can create a strategy that will minimize your costs and maximize your profit. 

Establish a positive cash flow

Cash is required to fuel any business. If you’re running a small business then you know that you have to pay bills, salaries, taxes and other expenses necessary for smooth business operations. They all have one thing in common – they require cash. Without cash to pay for your expenses, you’re going to be in debt. Establishing a positive cash flow isn’t simple, but it’s necessary to run a debt-free business. For instance, many small business owners stay on their current jobs, while developing their own business at the same time. That’s a good way to generate cash that you can invest in your business.

Furthermore, if you accept invoices as payment then you should be aware that if your expenses, such as bills or taxes, are due before you’re able to collect money from your sales, it will hurt your cash flow. Normally, invoices take 30 to 90 days to collect, but you might need cash sooner than that. Luckily, businesses can turn their unpaid invoices into fast cash with invoice factoring. The way it works is that you collect the amount of cash you’re owed from invoices from a factoring company for a small fee. In exchange, the factoring company gets paid when you customer’s invoices are collected. That way, you get the cash without having to wait until invoices are due.

Always know your expenses

As mentioned before, running a business consists of paying for expenses. Knowing which expenses you have to pay and how much you have to spend in advance is key to running a debt-free business. If you miss out on any payments, you may end up in financial trouble and even debt. Every late payment carries a fee and every financial setback may ruin your plans. Taxes, for example, are one of the most complicated expenses to calculate.

As a matter of fact, tax payments are one of the leading concerns of small business owners in the U.S. according to the National Federation of Independent Business survey. Simply put, if you miscalculate your taxes you may end up in a financial disaster. However, if you know upfront what to pay, when to pay it and how much, you can easily plan your budget to involve expenses without having to go into debt to cover them.

Don’t try to accomplish everything on your own

One of the biggest issues that business owners face is trying to do everything on their own, in order to cut costs and save money for business development. The idea is great, but it doesn’t work well in reality. A lot of solopreneurs start their business as a sole proprietorship in order to save money on business structure fees and licenses, which means they’re responsible for every business operation, as well as its debts.

Carrying everything on your back will wear you out eventually, so it’s not the question of if, but when. Once you are worn out, you’re more likely to make a crucial mistake that will cost you in the long run. That can mean going in debt or even business failure as a whole. Moreover, if you’re cutting costs by starting a sole proprietorship, it means that every legal action due to financial issues goes straight to the owner. Lawsuits alone can bury you in debt for years to come.

That’s why you should invest wisely and outsource some help to delegate tasks and make sure you don’t get overwhelmed. A good example of outsourced help is a virtual assistant, an accountant or a bookkeeper, lawyer, IT support and so on. Spend wisely so that it doesn’t cost you in the end, which includes starting a Limited Liability Company (LLC) over sole proprietorship as well.

Avoid borrowing capital

If you want to run a debt-free business you should avoid any types of borrowed capital, such as bank loans, government funding or alternative types of lending. All off these are considered debts which you must repay with interest. You may be tempted to borrow capital as it will get you where you want to be much faster.

However, if you want a debt-free business, you’ll have to sacrifice fast growth for slow growth. A fast growth carries more risk and you have less flexibility, as the more you borrow the more you’ll have to spend your profits on getting out of debt and if your business ever runs into a financial trouble, you may end up owning even more. If you take time to save your profits and break even for a certain period, you’ll be able to save enough to scale your business without going in debt.

A debt-free business sounds more like fantasy, but with careful planning and with good strategizing, it can become reality. If you want to reach success slowly but surely, then you might be able to run a debt-free business after all.