In 2017, the U.S. Small Business Administration reported that there are four sources of capital entrepreneurs turn to in order to finance their businesses. 21.9% of firms utilize personal and family savings with 5.7% of small businesses opting to use business profits and assets. Business loans from financial institutions come in at 4.5% and 3.3% of entrepreneurs turn to business credit cards. It’s a fair mix of personal equity and traditional debt, with the SBA noting that in 2016 63% of businesses carried some form of debt.
It’s a challenge to pay off debt while running a small business, especially if you’re turning to multiple sources of capital (like loans and credit cards) to keep your startup afloat. If you’re ready to seek out options that don’t include bootstrapping and endless penny pinching, here are a few methods you can explore to make debt elimination manageable.
Create a cash flow plan
Before you begin budgeting or attempting to pay down any debt, take an in-depth look at your financial reports. What do the profits and losses for your business look like? The cash flow plan you create will zoom in on the money coming in your business and how it can cover the expenses vital to its survival. Determine what you will spend versus what you can cut out. A few costs you can trim back on that will help benefit your budget include joining a coworking space instead of leasing out a building, renting out equipment rather than buying new furniture, and going paperless.
Snowball Method versus Stack Method
Two of the most popular methods for paying down, and eventually off, debt are the Snowball Method and Stack Method. Here’s a quick look at what each one entails so you can figure out which is the best fit for your budget.
Snowball Method: Start by paying off the debt or loans with the smallest balances and work your way to the ones with the largest amounts. By the time you’ve eliminated all of the smaller amounts, you’ll only have the large debt to focus on paying in full without any other financial distractions.
Stack Method: This one goes in the opposite direction, where the largest debt or loan with the highest interest rate is paid off first, and everything else with a lower interest rate is tackled afterwards. Once the debt with the highest interest rate is paid off, your credit score will begin to improve which will allow for more opportunities to benefit the business.
Hang on to receipts
From lunches out with potential clients to traveling for work-related functions, your receipts do more than help you out when it’s time to start doing your taxes. They also serve as a footprint for determining which expenses you’re making are necessities or err on the more frivolous side, like a daily Starbucks run for yourself that doesn’t exactly help to benefit your business in the long run.
Create a financial cushion for yourself
If your main source of capital means dipping into your personal or family savings, it’s a good idea to budget just enough so that you can continue paying off debt and ease into rebuilding the savings you pulled money out from. When revenue is strong with your business, add more money to your savings. Additionally, It’s also wise to create a backup savings account in the event of a downturn — a safety net goes a long way in assisting a small business in the event of unexpected emergencies.