When your start-up looks poised to start going places, it’s important to grow it and start watching those profits rise. But at the same time, you should avoid accruing debt, as this can seriously hinder your progress in the future. Here’s how to achieve that growth without debt.
The first thing to think about is your finance options. A lot of companies choose to boot- strap, or in other words, self-fund to maintain full ownership in the business. This approach is fine, as long as you are able to keep it up: if you have to take out a loan or mortgage in order to gather more funds, you will be in debt right away. As for running out of money at a crucial moment, this could ruin your chances of success.
On the other hand, exchanging investments for equity can also be a poor choice. The current value of your company could be nothing compared to what it is worth in the future. Do you really want to give all of that potential away? The solution could be convertible debt, which allows you to set a value only once you are better set up and have achieved some of that potential.
Create a Cash Reserve
When things are going well, the temptation can be to reinvest everything or pay yourself a higher salary. Instead, consider building a cash reserve. You save as much as you can, without limiting your growth, and put this to one side. You should aim to build up a year’s operational costs at least, as this will allow you to cope if things go wrong. Imagine if all of the companies which suffered during the recent economic crash had had this reserve: very few would have gone under. A cash reserve can also be called upon when you need to make that big investment for the next step.
Not many people want to hear this one but for some businesses (especially with new business owners) this is crucial. When attempting to stay debt-free, the important thing is not to run before you can walk. For some companies, expanding too fast can actually signal the death knell, causing them to go bust. If you slowly grow by only doing as much as you can comfortably manage, you will be more likely to stick around for the long term. After all, what would you prefer: making ten times the profits for one year, or doubling your profits every year for the next decade?
Know Your Finances
It’s very important that finances are controlled at all times when running a business, and even more so if you wish to avoid debt. A good plan going forward is to create an operational budget, which states how much you are able to spend during the year. If your funds are tight and you need more room, you may find that you can cut costs elsewhere without suffering. If you do not have a strong plan like this in place, you may never realize that you could be saving money. You should also know intimately how much you need to keep going with any and all of your product lines or services, so that when it comes to making big decisions, you have the figures to back you up.
Finally, if you are self-financing, maybe it’s time to cut back. Rather than living like a wealthy business owner, see if you can live like a student. If you can do anything more cheaply, do it. That way you have more money to put into your business. Living well within your means is a great way to avoid debt. Stay in your financial lane!
Growing your company debt-free is something that can absolutely be achieved, but it requires a cool and level-headed approach to business.
Emily Burgess is an avid blogger who enjoys writing about all aspects of improving a business, be it marketing, customer service or training. Emily is currently sharing some of her ideas at Course Guru – experts in the field of online education. Personally, she's a great fan of foreign languages.
I hope you enjoyed this article on how to grow your company debt free and maintain equity.
Interested in more small business and startup advice?
Read My Posts:
- 10 Dollar Digital Media Startup
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Best Of Luck In Business To You All!
Michael J. Schiemer of Schiemer Consulting
Enthusiastic Entrepreneur & Owner of Frugal Business
Digital Marketing, Social Media, & Entrepreneurship on a Budget
Bootstrap Business: Money - Marketing - Motivation
Mike Schiemer Builds Better Business
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