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What Entrepreneurs Should Know About Debt Handling & Management

What Entrepreneurs Should Know About Debt Handling & Management

The word "debt" conjures up images of mortgages, crippling student loans, and monthly credit card balances. In general, they are intended for individual consumption. Small business debt typically involves funds borrowed by the founders of the business to start the company or make investments. The hope is that these investments will produce profits that will later help pay off short-term corporate debt and continue to generate profits long after the debt is paid off.

Usually, founders only look to banks and other creditors after exhausting their options, for example, by attracting more upfront investment. The reason is that going into debt personally to run a startup is too risky. We know that startups fail or become profitable after many years. This may not give the founders enough time to find funds to pay off the debt. Not having this will play on their mind and add to the already enormous amount of stress.


How to manage debt as an entrepreneur

Borrow as little as possible with the longest possible repayment period

Before going into personal debt, founders should first work with their accountants to determine how much is needed and when. Minimizing the amount borrowed over a long period gives founders space to distance themselves from debt repayments.


Friends and family

Depending on your family relationships, this is a path that can be considered. Sometimes more than one family member may be willing to borrow small amounts each. This way, the burden is not too heavy for one person. The biggest risk in household loans is that the inability to repay the loans can affect personal relationships. Moreover, if you do not repay these loans, this path may be closed later.


Find crowdfunding

If attracting investment from angel investors or venture capitalists is not an option, you may want to consider crowdfunding. This is exceptionally feasible if the proposed product or service sold by your startup has mass appeal or attracts certain niche markets. It is vital that the layman can understand the purpose of starting without giving too much explanation.


Check the creditor

If a creditor is willing to lend you without having a decent credit score, be very careful. It is probably a scam. It can be particularly helpful to take steps to improve your credit score and apply for a loan from a legitimate source.


Microcredit

The US Small Business Administration's microcredit program provides loans of up to $50,000 to small businesses with average microcredit of around $13,000. They are easier to obtain than larger loans, but they may not be sufficient for your needs. They are administered by nonprofit community creditors and are generally easier to obtain than high-value loans. Some focus on entrepreneurs from minority communities. These are great home loans. The available amounts may be insufficient for all borrowers. However, these microloans can help you get larger loans in the future.


Credit Card

Business credit cards are a different option to consider. This should be used for immediate needs, which can be paid for quickly by themselves. Approach this option with caution. Small businesses that depend heavily on credit card financing often fail.


Subsidies

Private foundations and government agencies provide grants to small businesses. There may be specialized scholarships for veterans and women. It is free money. However, be prepared to take the time to prepare long and tedious grant applications. There will also be results.


Do the math

Find out the details of loan contracts. According to the Federal Reserve, the current average APR (Annual percentage rate) for a two-year personal loan is 9.58%, while the average APR for a credit card is 16.30%. The payback period can range from a few months to several years. Some lenders may charge a fee if you pay off the loan earlier than expected.

In addition to the above-mentioned points, make sure you have a solid business plan. You have advisers who don't hesitate to list their dead spots. Face them all before you borrow. A successful repayment leads to an increase in the credit score and increases the chances of borrowing money in the future. Otherwise, it could be a disaster for your business and your financial reputation.


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