5 Ways Smart Businesses Handle Debt

Like it? Share it!

The day you first get an investor to sign on the dotted line is always exciting—but small business debt, like every other kind of debt, is a dangerous beast. If you can’t get your business off the ground without significant up-front investment, check out these tips to keep your small business funded, healthy, and independent.

1. Look for mentors, not just investors

Guidance often has more to do with your success than startup capital, and sometimes you can find both in the same place. Angel investors, especially those who have succeeded as entrepreneurs, are often the most passionate advocates and mentors for a small business. Experienced entrepreneurs get excited about new ideas, know the challenges you face starting out, and can provide advice at critical moments in the development of your business. If you can’t find an angel investor, business incubators can be a great way to network with like-minded people, get mentoring, and secure funding.

 2. Take what you need, and no more

This one principle trips up more aspiring entrepreneurs than almost any other: bigger is not always better. One successful entrepreneur compared startup capital to the gears on a bicycle—you want just enough to propel you into the next gear, and getting too much financing can be as damaging as getting too little. Underfunded startups are stuck in first gear, putting in furious effort for minimal returns; while overfunded startups suck in cash before they’ve built the infrastructure and momentum to use it, like trying to start a bike in fifth gear.

 3. Don’t rush to raise money

Too many startups looking for financing aren’t really startups yet—they’re just ideas in the mind of the entrepreneur—and they get ripped apart by savvy investors, because you can’t know the challenges your business will face until you’ve tried to make it work yourself.

Before you become your company’s pitchman, you need to build some serious “sweat equity”—put as much work and thought into your business as you can while remaining gainfully employed. Entrepreneurship is invariably more work than a steady job, and pays less in the beginning—so make sure it’s something you love enough to do in your off-hours first. Then, when you’re ready to fund raise, you’ll know exactly what to ask of potential investors, and be quick with solutions to their concerns.

 4. Keep clear boundaries with investors and partners

Good entrepreneurs have a contingency plan if things go belly up—but are you prepared for your startup to succeed? A great many startups begin with a cash infusion from one partner’s savings, or an investment from friends and family—and while this isn’t a bad way to start a business, recognize that unequal contributions, whether in work or in cash, create expectations.

Before any money comes into your business, get the involved parties together to discuss exactly what return they can expect to receive on their contribution, and get it in writing. If your startup receives a large gift from friends or family, swallow the awkwardness and have a frank discussion about what that means. One of the real benefits of seeking professional investment is that their expectations will be very clear and in writing.

5. Be wary of credit

Very few startups experience enough growth to keep up with a typical credit card’s interest rate, which makes financing your business on a credit card a losing proposition in nearly every case. Drawing investors means sacrificing some autonomy and committing to more stringent business accounting practices, but oversight and accountability are generally a healthy thing for startups. Use credit sparingly to smooth out short-run cash flow, but never use it as an alternative to solid investment.

Tara Wagner is a staff writer for TechBreach. She has worked from home for over a decade, and loves sharing news and advice with fellow telecommuting moms and dads. She’s fascinated by new tech and new ideas; and when she finds time to unplug, she enjoys long hikes in the mountains near her home. She lives in Denver.

Like it? Share it!