When starting a business, it can be challenging to find the funding you need to hit the ground running, which is why many business owners choose to take on business debt. When mishandled, however, debt can decrease profitability, burden you with interest expenses and, in the worst case, cause your business to fail.

So, what does this mean for start-up companies and small business owners? Here’s how to avoid unnecessary business debt while setting a strong foundation for your future success.

Good Debt vs. Bad Debt

In the most simple terms, debt is “something owed.” And not all debt is created equal. The main problem lies with what financial experts call “bad debt.”

Good debt is an asset that increases your future net worth as a company. It is an investment in something tangible that grows in value, such as technology, education or renting a space you need to keep your business running. Good debt also has reasonable interest rates and a payment plan that is within your means.

If you have business debt, making consistent payment can help you build credit, demonstrating your credibility to investors and opening up more opportunities in the future.

Bad debt, on the other hand, is debt that will ultimately decrease your net worth as a company. It does not have a clear Return On Investment (ROI). This might mean excessive supplies and accessories, a depreciating asset or a loan with terms you cannot afford.

How to Start a Business Without Unnecessary Debt

While starting a business without accruing debt can be challenging, it is not impossible. In many situations, it’s a matter of evaluating your resources, making a strategic plan and finding creative ways to finance your business. Here are a few helpful tips for starting a business while staying out of debt.

1. Start at Home: Consider working from home or another space that’s available to you (such as a friend’s spare room or loft). This can help you avoid costly rent payments while you get your business off the ground.

2. Narrow Your Focus: If you are selling a product, focus on creating and perfecting your core offering before branching out with different variations. This will also allow you to purchase less inventory, making your startup costs more manageable.

3. Do It Yourself: While outsourcing is an important part of running a business, there are many tasks you can start doing yourself while in the early stages of your startup. Free websites (such as SquareSpace or Canva) can help you get started with building a website or doing some basic marketing.

4. Make Good Use of Your Cash Flow: In the early stages, invest profits back into running the business as you continue to grow, avoiding debt whenever possible.

5. Apply for Funding: You might be able to apply for small business grants from the federal, state or local government specifically created for starting a small business. NOTE: These are highly competitive and often limited to certain industries – and are not often used to fund traditional startup costs.

6. Stick to Your Budget: It’s always a good idea to work with an accountant to create a budget and keep your spending on track.

Can you tell which of the following strategies set your business up for success, and which could put it at risk? Test your knowledge to find out.

Types of Business Debt

Even when doing your best to finance your business without debt, there are times you may need additional funding to make ends meet. Before entering into debt, make sure you are working with a reliable creditor, and you are only taking on as much debt as is absolutely necessary. Study the terms of your agreement carefully and check that the repayment plan is one you can afford without racking up excessive interest.

A few of the most common ways to take on business debt include:

Term Loan: A lump sum of money borrowed from a bank or other financial institution. Must be repaid overtime with interest.

SBA Loan: A loan backed by the SBA (Small Business Organization), a U.S. government agency that supports small businesses through loan guarantees, counseling and training. It does not lend directly but partners with lenders to reduce their risk. This includes:

• 7(a): General business financing

• 504: Real estate/equipment

• Microloans: Up to $50,000 for startups/small needs

As a business owner, it’s crucial to understand the terms of your loan to manage your debt responsibly.

How to Manage Debt Responsibly

Worried about how debt will affect your business? Follow these tips to stay on top of your finances and keep your company on the right track.

1. Borrow with Purpose. Do not take out a loan without a specific, measurable plan for what the money will be used for and whether it will increase profitability.

2. Track Carefully. Regularly look over your debt-to-income ratio, cash flow and interest rates to keep track of your financial standing. Use spreadsheets or work with a Certified Public Accountant (CPA) to crunch the numbers each month.

3. Stick to a Plan. Take a hard look at your finances and create a debt repayment plan that can help you pay it down as quickly as possible – and stick to it.

Call in the Experts

If you're a small business owner looking to find success while avoiding business debt, working with an accountant can be a game-changer. At Harvard & Associates, CPA, we provide expert accounting solutions tailored to your needs, helping you save time, reduce stress and maximize your financial potential. Our team of CPAs is experienced, knowledgeable and dedicated to providing financial guidance, strategic tax planning and reliable accounting solutions.

With offices in Tallahassee, FL and Thomasville, GA, Harvard & Associates can provide you with the bookkeeping, tax and financial services you need. Whether you're an individual, a small business or a growing enterprise, we're here to help. Call us at (850) 224-9008 or contact us online to start a long-term relationship with the local accounting expertise and service you expect.

DISCLAIMER: This blog is for informational purposes only and does not constitute legal, financial or tax advice.