Cash drives your business. It gives you the resources you need to run your operations and fund expansion. However, it matters where that fuel comes from. Rely too heavily on borrowed money and you could fall into a debt cycle.
This happens when you chase success by continually adding to your debt load. As your financing costs mount, the money available for operations becomes more limited. This pinch forces you to seek out new borrowings. Now you’re stuck in a debt cycle.
These are hard to escape. What’s more, they can often become fatal. Get too laden with debt, and your business won’t survive. Here are some of the risks that come when your borrowing gets too heavy:
- Rising finance costs squeeze your budget. As you add debt, you also add the expense of servicing those borrowings. This represents less money you have for operational expenditures.
- As your debt load rises, finding new lenders becomes difficult. As your balance sheet becomes less attractive, finding your next financing partner gets more complicated.
- Future borrowings become more expensive. As lenders become more scarce, you’ll need to take on riskier terms, including higher interest rates.
- You are more at risk to sudden setbacks. If you’re already laden with debt, what can you do in an emergency? Your options become much more limited.
- Unwinding your debt cycle can take years. Even when you get on the right track, it will take a significant amount of time to pay down your accumulated liabilities.
As you can see, entering a debt cycle can stymie your near-term operations and put your longer-term financial health at risk. The best solution is to avoid a debt cycle completely. Here are some steps to consider:
Ways to Avoid a Debt Cycle for Your Organization
Have Realistic Ambitions
Every business manager wants to conquer the world. However, growth comes at a cost. Get too ambitious about your plans, and you could quickly outrun your budget restraints. This will have you seeking new sources of funds.
Instead, limit your expansion plans to projects you can easily afford. Stay ambitious. Just don’t make bets that will eventually force you into debt decisions you’ll regret.
Run a Tight Operation
Debt becomes less necessary if you can stick to your budget. Let your incoming revenues determine your spending limits. From there, have procedures in place to keep everyone mindful of the bottom line. An efficient, profitable enterprise will protect you from unnecessary debt, as well as lower the risk that you’ll run into a cash emergency.
Understand Your Funding Options
You need cash to run your business. Sometimes taking on debt represents the right strategy. The key is to understand your alternatives. You can also turn to other tactics that might make more sense for your situation, such as equity investors.
Looking for a Financing Partner That Can Help Grow Your Business?
It helps to have a strong financing partner. Frontline Funding can give you the information you need to make the right decision for your operation.
Contact Frontline today to learn more.