How Entrepreneurs Can Use Debt Productively and Fast Track Their Millionaire Ambitions?

As an entrepreneur, your first objective would be to get the startup rolling and then achieving profitability so that you can put into the fast track with angel and venture funding. You can then achieve amazing valuations on its IPO and become a millionaire. However, to get your business off the ground, it is important to take on debt and if you are not able to say on top of it, it can easily crush you. It is also vital for entrepreneurs to know and understand the difference between good debt and bad debt so that you know what to take on and what to avoid. Any debt that you can use to make your company grow is essentially good debt; typically, these are loans, lines of credit, or a mortgage. Bad debt is money that you can’t use to make your business more productive; typically, the funds are used to buy things that are really not required or stuff that you can’t afford. According to forbes.com, if debt does not add to your cash flow, it should be avoided.

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Reasons Why Entrepreneurs Get Trapped by Bad Debt

How Entrepreneurs Can Use Debt Productively

1. Cash flow can be dynamic

There is no more exhilarating feeling than to see cash flowing into the business as sales take off, however, most business owners, especially startup owners do not realize that for the cash flow to stabilize, it can take some time and till then, it can be a roller coaster ride. If the sales are down one month, it is all too very easy to turn to credit cards to buy the essentials and think that the dues can be paid off with the sale proceeds of the following month. If for some reason, the cash flow does not improve or the business owner finds some other good reason for deploying the cash generated, the card dues don’t get repaid and soon starts snowballing.

2. Expect too much from the business too soon

There are many entrepreneurs who are too optimistic and think that the business will start generating sufficient profits to be able to sustain them. They may have quit their day jobs to be able to devote time and effort to the startup but the business is simply not mature enough to generate the desired surpluses. It is really important for entrepreneurs not to start flogging the business to death by over-leveraging debt. All businesses need time and sustained reinvestment to stabilize them and get them on to the proper growth path. Starting to live off the cash flows of the business may well mean a serious problem for the entrepreneur.

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3. Be too confident

When the business has been on a good growth mode for the first few years and entrepreneurs have used good debt to grow the business, it can lull them into a false sense of security. A closer look at their capital structure may very well reveal that they have too much debt and when there is a downturn in the market, or a loss of a few important customers, the entry of a new and more aggressive player, the ensuing disruption in the market may be too much for the business owner to handle. The sales may crash drastically leading to a situation where the cash flows are simply not sufficient to sustain the business and pay back the debts. Debt consolidation with the assistance of a leading company may well be a solution to organizing your debts and reducing your interest expense.

4. How to Get Out of Bad Debt?

Since by its very nature, bad debt is damaging to the health of your business, it is important to get rid of it as quickly as possible. Implementing a debt snowballing strategy is a very effective method of getting rid of debt fast. The strategy is simple but requires dedicated effort to make it a success. The plan is so called because just like a snowball it gathers momentum with time. You first need to make a list of all your bad debts; the ordering can be by the amount due or by the rate of interest, as you like. Ordering the debts by the rate of interest enables you to save the maximum money but if have a problem of motivation, you can list them in ascending order and start paying off the lowest due amount the first.

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The next step is finding out how much surplus you can generate every month for paying off your debts. Try to spend less so that you can save more and strictly avoid taking on new debt. The idea is to pay back the maximum amount towards the debt while continuing to make the minimum payments of the other debts. After the first debt has been paid off, the amount can be deployed for paying off the next one and so one till everything is paid off. The trick is to maintain discipline till you pay off the last debt and speed up the process by saving a much as possible by keeping your lifestyle expenses to the minimum.

Conclusion

Once you have managed to wind down your bad debts, it is very important for you not lose sight of your objectives and clock up debt that can have you struggling again. Since credit cards are very easy to use, it is very easy to keep on spending beyond your means. Even though in the initial stages, it is often necessary for entrepreneurs to use credit cards to finance their businesses, they need to keep a strict watch over the expenses and make sure that the budget of the business can accommodate them. Never make the mistake of paying for the personal expenses with the same card that you use for business needs as it can become very difficult to untangle the accounts. It is also very important to start making a budget for your business so that you know exactly where your money is being spent and where you need to curb expenses. Budgeting can be frustrating in the initial months but with time, you will get used to it and can make it a very productive tool for business growth thus this is how Entrepreneurs can use debt productively and fast track their millionaire ambitions.

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