Episode 132: 7 Tips To Keep Your Startup Debt Free!

Starting your own business is an exciting time. But keeping you budget in check isn’t as exciting. One of the biggest problems many startups face is budgeting and debt. How do you decide what is good debt? How do you decide what to spend on and what to save on? These small details are critical for your small business and can make or break its survival in the first few years. These 7 tips will help you prioritize your budget and keep your small business afloat so it can turn into a long-term business.

Roger: Welcome to Local SEO Today. I’m Roger Murphy.

John: And I’m John Vuong.

Roger: We want to welcome you to our podcast and we want to thank Kayla Claus who’s working the technical back end of the cameras and sound today so Kayla thanks for your hard work. So today John, in this podcast we’re going to talk to entrepreneurs, really budding entrepreneurs and business owners starting in business and it’s about debt and it’s about taking on debt, or not taking on debt. How to….how to get your business rolling…

John: Without taking on too much debt.

Roger: That’s right. The right way.

John: Yeah so the first thing we want to talk about is…

Roger: And we’ve both done this by the way. We both started businesses so in terms of experience we know what it means to start a business on a shoestring and make it work so going…

John: Exactly so the first thing you want to make sure is don’t borrow if you don’t have to borrow, right? So I understand everyone has a dream to be their own boss, right? Be an entrepreneur, be very successful but make sure you have some sort of funds or emergency funds to start the business yourself because once you start that cycle of borrowing money it’s very difficult to get out of.

Roger: So the idea…let’s say your service based business and if you’ve…this is all types of businesses but we’ll talk about service based businesses if you’re getting started really reach out and get customers first before you start taking on a lot of debt and here’s an example and I’ve mentioned this one time before I met this young gentleman years ago that was getting into the landscaping and snow removal business and what’d he do he locked himself into a 5 or 7 year extremely expensive lease loan on a vehicle with a blade on the front. It could have been John, close to fifty or sixty or seventy thousand dollars.

John: And it’s a brand new vehicle.

Roger: Brand new vehicle.

John: Without even getting customers…

Roger: Zero customers. So think of it how can…there are ways to get your business started not with brand new equipment but there might be some good used ones but you have to think smart don’t just go purchase all this debt or all this equipment, load on the debt and then go look for customers. It doesn’t work that way.

John: And instead what I would have done is maybe focus on acquiring new customers, generating revenue before anticipating you know, buying an asset or depreciating an asset. So use what you have like if you have an existing car already, make use of it cause it’s fully paid for and until you make enough money to subsidize the cost, right?

Roger: We’ve met people in the pest control industry they start off with their car. Just their hatchback. They got license, got the proper whatever but they didn’t go by a huge or leased a Gripping van at a $1,000 a month. No, they started their own vehicle as they grow, they grow into it.

John: Exactly.

Roger: So you don’t just go take on a whole bunch of expensive debt and by the way that the finance companies love this sort of stuff. They’ve given an asset to you that got all the profit and they’re getting…they’re taking money from you every month whether you have the clients or not and that’s not a great situation.

John: Yeah, I mean the whole point about living mean…is making sure you can still live as well, right? Because you still have your everyday expenses, right? You know what kind of revenue you need to generate to actually live, right? So don’t take that extra burden of expenses, right?

Roger: Exactly. There’s so many ways to your point, find those customers first and then get the equipment needed to serve them. I met upholsterers over the years that started their business and said, “I made money from the first day I ever opened my business.” It’s because they got the customers first but then they bought the equipment to do whatever. They didn’t sign themselves into expensive leases, you find rental, you find short term so there’s many…many…many ways to keep and live lean in the early days.

John: Yeah, the next thing we want to talk about is do not borrow… like if you have to borrow make sure you borrow smart with as low interest as possible, right? Because ultimately what you want to do is don’t live on debt, right? Cause eventually you have to pay back the borrowed money unless it is a grant but the far in between, right? Like if you need to…if you’re gonna have to borrow ask friends and family with low, very low interest first and then if you’re gonna go to the bank to borrow money make sure you use your line of credit before you finance everything on your credit card or credit line because again you don’t want to live on paying interest and their very high interest.

Roger: And to your point John, there’s a credit line you’d get to the bank and there’s a credit card from the bank. Know those numbers credit card debt could easily be nineteen, twenty four, twenty eight percent which is hugely expensive annual interest versus a line of credit that you can access only as you require it as opposed to taking it all and stick it in your in your bank account that’s… there’s better ways and smarter ways. Debt is not your friend. It’s necessary but you want to be very…very…very careful with them.

John: And the good thing about a line of credit on your bank account is there’s an opportunity to just pay interest only, right? So the interest is lower usually it’s you know, five to eight percent I would say or even prime depending on how good your credit is but ultimately that’s the best type of borrowing loan that you can get from the bank.

Roger: And something we didn’t talk about but in terms of staying out of debt is really you need to sit on as a entrepreneur look at what your product of services, look at what your margins are and work out what your break-even point is even per day meaning for me to…for you to be in business with the cost of your goods, gas insurance, marketing and whatever it is. What is your net per day you need in sales? Because that will really guide you as to, “Hey, if I take on some debt how long it’s going to take me to pay off that debt?” You really need to know your numbers.

John: Yeah and especially if you’re in a seasonal type of business even…need to know it even further, right? Because whenever everything looks good you may be you know, it may look great on the books but you never know what’s gonna happen in the down season, in the slow season.

Roger: So smart things are of course to debt, use it as little as possible. Be very careful but even pay it down when you’re busy because to your point, John if you’re in a seasonal business and the slow season comes why have that hang over your head. Pay it down, pay it off while you are…while revenues are really rolling in.

John: Exactly so next thing I want to talk about is only borrow money for revenue generating activities because ultimately you want to make sure your business is thriving, right? That is growing so how can you use borrowed money to generate more revenue to pay it off eventually? Leverage it. Because you know, at the beginning it might be tough, right? Like you can utilize all your time and resources to do all the sales marketing yourself but if you’re able to leverage that piece and hopefully get more leads that will help you pay for some of the debt that you borrowed, right? Versus if you were to borrow money for depreciation, depreciating type of assets such as a car or you know, anything that actually has no real tangible revenue associated to it.

Roger: Exactly.

John: So the next thing I wanna talk about is reduce your capital expenditures, right? So wherever you can, save money especially if you’re starting off like does that mean you should just work from home? Maybe at the beginning, to save money on rent and all the variable costs associated with it.

Roger: The car we spoke of or the vehicle instead of taking it on an expensive service vehicle can you work out of a older vehicle you already have it to get once…once you get rolling then you can upgrade but in the early days keep these expenditures down.

John: Yeah like even if you are in a business like do you need a brand-new laptop? Or can you just use what you currently have? Do you need a brand new phone?

Roger: If you need an office space to work out of. There are shared spaces. Many times you’ll see driving around and you don’t just go for the expensive executive suites or whatever at a thousand dollars a month but you could actually find, “Hey, here’s an office space for two hundred dollars a month.” And all of a sudden you’ve got a physical space and an address so really search out the best value to run your business.

John: Yeah and you know, maybe at the beginning you don’t have the revenue that you’re anticipating, right? So you need to find other sources of income, right? So we always talk about you know, bootstrapping but also you know, figure out where you’re gonna generate revenue.

Roger: Exactly, the idea of the bringing in, coming in from two different sources or more than two it is if you’re starting a business really consider…Can you keep your day job while starting a side hustle on this business till it gets rolling? If that’s the long-term plan, you love and you’re gonna move into his business long term. Great. Really think about, can you keep your day job going also? Because that is revenue that keeps your life going.

John: Yeah and maybe it means having a part-time job to subsidize your business, right? Or pay for all your necessities: brand, living, food.

Roger: Side hustle.

John: Yeah, you need some sort of income, right? Stability, right? The other thing is maybe you can offer freelance jobs as well, right? So you know, again side hustles but at a lower price, right? Like whatever you can do to really run your business and maybe at the beginning you offer it at a lower price just to gain traction, right? Whatever it is to generate revenue. The big thing is maybe at the beginning offering it for free to get clients and then slowly market out.

Roger: And this idea of…because the whole idea is maybe you can’t stay out of debt, maybe you have to take on debt to get this business going but it’s the right type of debt, it’s the lowest price because I know I can get a used vehicle way cheaper that’ll do the same job as an expensive and brand new and John, I know I can find rentals face and way lower price than signing ten-year renewable lease with all the different add-ons to products or materials you need to run your business whether it’s tools and equipment. There’s things out there where you can find lower-cost, quality tools. They may not be perfect but they’ll do…they’ll serve you in the short term.

John: Great! Well the last thing I want to talk about is make a plan to really reduce your debt as well so especially if you’re borrowing stuff early on.You need a plan to pay back just like when you have a mortgage you just have to slowly pay it back, right? Same with your business so make sure you have a set amount of years and you want to pay back put some sort of an arrangement with whoever you’re borrowing money from and if there’s a way to speed up or expedite it maybe you can reduce the interest rate like negotiate.

Roger: Exactly maybe even when the revenue comes into your bank account automatically not savings but pull a little amount off. It goes into a different account that becomes the slush fund you never even see it. That builds up to start paying off your other debts. Lots of little strategies there.

John: Yeah so because the big thing is when people see a lot of money in their bank account they feel like things are going very well but you have to remember there’s certain things that you always have to pay such as taxes and if you borrowed money principal on it, interest on it and also any of your necessities like fixed cost.

Roger: Exactly so and the idea of this debt, your plan to pay off this debt if you have debt on both the credit card and a line of credit from the bank. It sounds like, “Ah! Both our loans, no problem.” Be smarter go after the highest interest debt to get rid of it first so between the two John, of a credit line and a credit card?

John: Credit card.

Roger: Get rid of that credit card. Even try and get the debt off the credit card on to line of credit because you could move literally cost of 28 percent annual maybe down to 9,7 who knows whatever you negotiate in so be very smart that all debt is not created equal.

John: And consolidate your debt. If you have multiple ways, phases to the lowest interest rate, right? So you know, there’s just smart ways to really run a business and be smart with your money.

Roger: Yes, something I should mention…also John, how many credit cards a person should have in business?

John: Just a couple one or two.

Roger: One or two maybe not one but two just in case but I know people that have got you know, 5, 6, 7, 8 cards out there. And they thought, “Oh, it’s free money.” It’s not free money. You’re gonna pay that back so…

John: And they borrow, they maximize one credit card and then the next and not pay anything back, right?

Roger: Exactly so being a business owner and an entrepreneur it’s a serious business. It is…you gotta do your homework when it comes to finances, you gotta know your costs, your sales coming in and be so respectful of this debt. Yes, it’s important you need it to get started but it’s only a stepping, a leverage point to grow your business.

John: Because ultimately you want to pay down all your debt and live comfortably, right? So once you remove all your debt then at least your margins…and you can live a better healthier business.

Roger: And you get to the point where yes, you’re using debt but it’s because it’s tax deductible and the interest is deductible. That’s all fine and good but that’s after you’ve got a business going not in the early days when there’s no revenue in.

John: Exactly so you come to a point where any credit card that you get, pay off right away, right? Because it allows you to pay…you know, borrow something for thirty days, right? So it’s a smart way to use debt.

Roger: Yeah. So John, I think this has been a very informative session today. It’s so important. It’s the basis of all businesses and that is…debt is important but you gotta get out of it as soon as you can. Be very respectful and be smart. So thank you for your time.

John: Thank you Roger.

Roger: Thank you for your advice. Thank you for watching Local SEO Today. We’ll see you again.

John: Thank you