managing debt as a business owner
The best way to manage your debt is to avoid it like the bloody plague…
Sorry, but I just had to start with that…
Because there’s just too many people taking on debt when they begin their entreprenerial journey.
And it’s downright stupid.
Not just irresponsible.
I get you’re maybe desperate to “do your own thing”.
And I get your boss totally sucks and your job is sucking your energy dry.
But leaving one bad situation for an even worse one…plus no guaranteed form of income…is much worse.
Talking from experience here (can you tell?).
So, in this article, I’m going to break down how you should avoid debt + what you can do about it if you’re already there.
You can also listen to the podcast recording I did with Jason Bond by clicking above.
Jason pulled himself out of $250,000 worth of debt before starting his business…
And he did it on a Teacher’s Salary.
So, no excuses.
Let’s get started.
First and foremost, let’s assume you’re not yet in debt but considering taking a business loan.
For one, you must be an alien if you got approved for a business loan in this day and age…
And two, run for the hills as fast as you can.
Because taking on debt right now is THE WORST thing you can do.
But Chris, I need funding to start?
It’s 2019 (depending on when you’re reading this).
The internet changed the game.
1. Don’t take a STUPID business loan.
This isn’t your grandma’s mom-and-pop hardware store that required substantial overhead.
In nearly all cases, you can get your biz rolling with less than $50/mo, if that.
Start with an MVP (minimum viable product) iteration of your business.
It may look like you just educating people on your desired area of service.
Building a content platform like YouTube or even this article you’re reading right now.
This will grow your audience, which in turn could potentially lead to you rendering services that make you money.
I’ve seen creators go from nothing to a six-figure business in six months, not at all uncommon.
Now, they are HUSTLING, don’t get it twisted.
But telling yourself you can’t do ANYTHING until you have someone else’s money is a recipe for early and swift disaster.
Entrepreneurs, successful ones, are extremely resourceful.
So this will be a great exercise for you.
Only a fool starts a business with a loan.
And it always ends in failure.
So, I don’t care if mom and dad have the money and want to support you…
Say “no” and carve out your own path by starting small and taking affordable steps.
2. Keep the day job or add some side hustles
The list of side-hustles I leveraged early in my life is absurd.
I could legit write an entirely new article just on that.
Check out my side hustle chat with Nick Loper, the side hustle guru.
Young cubs that are full of energy and have little real-world responsibilities can utilize this.
And with the Gig Economy on platforms like Uber, Airbnb and any of the delivery services, you can get by (not get rich) with severely reduced standards of living plus roomies.
Notice, though, you’re not getting rich…
You’re going to be scraping by, make no mistake about it.
Next are my night and weekend warriors.
Keep the day job and allocate time to work on your biz.
Maybe do an hour/day and six on the weekend.
You’ll amaze yourself with how much you can move the needle in your young business with 10-15 hours/week.
Is it ideal?
But it also gives you a guaranteed income to support your family, pay your mortgage and not destroy your marriage and/or sink you into massive debt.
I usually recommend this path for my older folks that DO have real-world responsibilities.
And I LIKE that you’re going to be unhappy in either of these situations.
Not because I’m a sick and twisted masochist…
But because you’re going to learn just how bad you want this thing.
And, if it fades in 3-6 months, you have your answer.
But burning the bridges immediately to then find out you don’t REALLY love this thing you jumped into is like building a prison wall around yourself (sound like it comes from experience – AGAIN?).
“outside funding is like a child wanting sweet and delicious candy…it looks amazing but it also results in cavities & poor health…”
3. Cut your damned expenses
Look, I get this is America (for many of you, anyways) and we have ‘standards’.
And I get it’s embarassing to tell your friends and family you just can’t afford to do things.
But here’s the deal…
7/10 people in the US right now are living paycheck to paycheck.
7 out of freaking 10.
What about all the nice, fancy cars and spectacular homes?
People are leveraged to their eyeballs.
And they fell for the loan trap, like you’re not going to do now.
You always have to think…someone is trying to get an angle on me.
Mortgages and loans are not given out because you’re just such a swell person.
They’re given out because they can make money on yo assssss, foo!
Do the math on a mortgage.
By the end of it (over 30 years) you’re paying nearly DOUBLE what it was listed at before you bought it.
You better have a steep appreciation, bud.
But we have this ‘standard’ by which we must keep up with the Joneses.
Screw the Jones family…
They’re BROKE and hiding behind their ‘things’.
If you want to create generational wealth with your business concept, be willing to do what they won’t.
So, no elaborate spending.
We want bare-bones, baby.
Find a 24 Hour Fitness or a Planet Fitness that’s $10/month.
Cut the stupid cable.
Close the blinds and don’t ramp up the AC.
And, most importantly, live your LIFE on something like Mint.
Mint is a personal finance tool that allows you to see where your money is REALLY going.
The average user has a credit score of 150 points higher than a non-user.
You’ll see the glaring areas where your spending is outrageous…
Make the adjustments and only keep the essentials.
4. Throw your credit cards in the trash
Literally, cut them up and throw them away.
Remember the part about people not being your friend and just making money off of you?
Yep, same story.
Because, once you fall into the hole, they’ve got you.
You’re now their debt slave.
It sounds harsh but…it kinda is.
People quickly spiral into massive debt and, when you’re starting a business, you have NO CLUE when payday is coming.
So, you have no predictable means to pay these things off.
Live your life on a cash basis…
Put those cards away…
And give yourself margins to live off of.
Should be simple.
Because it is.
4. Don’t Freak Out!
When we fall into debt, and let’s suppose you already have or it does happen to you along the way…
And it’s likely, even after all of this, that it will.
The main thing to remember is to not totally lose your ish about it.
Because Collection Agencies can be HELLA aggressive with commercial debts…
WAY more than personal debt.
And, if this happens to you, they are going to try and scare the hell out of you.
They are going to make pretty radical threats.
And it’s going to feel like the sky is falling on you.
This is their job and they’ve been trained to do this.
Now, ideal world, we wouldn’t be here…
But, if we are, let’s just be smart about it.
For one, they aren’t going to come to your shit like they say they will…
At least not for a while.
In other words, you don’t get a call or a letter and they show up the next day.
It’s a very lengthy process and the wheels churn slowly.
That doesn’t give you permission to completely ignore it.
But also know if your business is struggling, it’s in your best interest to keep your cash on hand until things turn back to the black again.
And the minute you start letting this crap distract you from righting the ship, it’s game over for you and guess what…?
For THEM too!
So, if you do want to operate out of integrity and honor your debts, which you should if at all possible, go make it happen.
They’ll be glad to take your money if/when that time comes.
Sure, your credit is going to be pinged…
But it will bounce back fast once you handle your business.
PLEASE remember I’m not telling you to deliberately drive yourself into debt.
Remember Rule #1…avoid it like the plague.
Because this part isn’t fun.
But the problem here is that too many entrepreneurs feel powerless.
And, in reality, you have way more power than you think.
Because it’s not against the law to not pay off your debts.
You’re not going to go to jail.
The only time that applies is if you skip out on paying taxes or student loans…
And even that takes YEARS.
So, calm down, focus on the mission, and start generating.
Work out the terms later, just kindly tell them you are unable to satisfy the note right now and you’re doing your best.
If you can get by just paying SOMETHING, analyze your situation and make that decision.
But remember, cash is king…
So, be careful where money is going.
5. Understand Personal Guarantees
Okay, so you need to understand what type of debt you’ve fallen into.
If it’s a personal credit card, you are definitely responsible…
Pretty cut and dry.
But business debts get a little trickier.
MOST institutions are going to require a personal guarantee on a line of credit or business credit cards.
You’ll see that in the paperwork you sign off on.
And this is all assuming you’ve been in busness for a while with at least two years of tax returns.
And, even then, they’ll still likely pin a personal guarantee to it.
Startups are risky…
And they know it.
So, before you get all cavalier about being approved for a line of credit with your bank, just know the buck still stops with you.
And what’s potentially worse is business can often rack up wayyyy more debt wayyyy faster than just individual expenses.
So, unless you do massive binge spending at Neiman’s, it’s likelier you’re going to massively sink yourself into debt with your business far deeper and quicker than you could personally.
And, if the business doesn’t work, you now have to pay it off WITHOUT the luxury of a profitable business and on a fixed salary.
Now, again, you don’t HAVE to pay it off.
But, you will be responsible for the debt.
So just make sure you know what you’re signing before you do and try to keep the spending under control.
It’s not a lifeline, it should be used for growth and Capital Expenditures that are tied again to growth…
Or even short-term cash flow management.
But never just use because you have no other option for months on end.
That road leads to significant misery.
6. Your Last Ditch Effort – Debt Validation
Sometimes things spiral out of control…
Speaking from experience here again.
The business is doing GREAT and you are rocking and rolling.
And then your health goes to SHIT and things implode (experience, again).
The business dies and the Collectors are circling like vultures trying to get the scraps before anyone else can.
For real, that’s the perfect metaphor.
They are going to come at you HARD.
And you need to be prepared.
It’s a scary time and even less fun.
And using what’s called the Debt Validation card may be a play you want to make.
In fact, I would force ALL Collection Efforts to provide Debt Validation before I paid a single dollar to anyone.
Why and what is it?
It’s essentially PROOF that you are responsible for this debt.
Because, if you have an LLC, C-Corp, S-Corp or pretty much anything besides a Sole Proprietorship or just winging everything personally with zero structure, the organization provides an extra layer of protection.
Not full immunity, don’t get it twisted.
People can STILL sue you, personally, even with an LLC in place…
But it’s just less likely they’ll win and they’ll have to go through significant layers of Discovery to prove you acted negligently in some way.
It may sound like magic fairy dust but I’ve personally gotten out of 10’s of thousands of dollars worth of BUSINESS debt because of this one move.
I’m not bragging about that…
I’m really not.
I’m actually ashamed of it.
Because it sucks to be in that situation.
But, business is business.
And laws are in place for a reason.
The company my company owed couldn’t manufsacture proof that anyone was personally responsible.
And so we were going to make them sue us to prove it.
And, over that little amount of money, they opted to not pursue.
I know sounds like a lot of money but when you consider how much litigation costs and how much money these companies make, it’s an insignificant figure.
I’ve had mentors of mine experience this and that’s where I received the advice.
It’s a last-ditch play, not an immediate go-to.
It’s a “Get Out of Jail” card and you should first do everything you can to honor your debts.
But, in some circumstances, that’s just not possible.
I was legit close to my death bed.
My health was a train wreck and there was zero possible way of me doing anything to honor those debts.
My business was insolvent and we were personally barely surviving.
I don’t want to lead you too far down this path but this can also work for some personal debts, not just business.
In many cases, divorce leads to the discovery that there was significant credit card debt.
Again, you may be inclined to play the debt validation card.
To learn more about that option, here’s an article for you to explore.
Hope this has been helpful…
If you’re already in debt, just know I feel for you and I’ve been in your shoes.
Sometimes, that makes all the difference with how alone you feel as you wallow in your ‘failures’.
It happens to the best of us and you are not alone.
Do your best to get yourself out of it and, at the end of this, you’ll be much better off for this experience…
Even though I know it doesn’t feel that way now.
Much love, my friend.
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