Whether debt is planned or unplanned, good or bad, businesses fall into debt for a number of reasons. Discover 10 of these potential reasons here….
Business is all about investment and sacrifice at the right times in order to see improvements in future. Of course, this can come in the form of debt; loans that may be taken out to support the development of the business.
Getting into debt is one thing, as long as it’s a smart business decision and you have a plan and the capabilities to pay it back. Without this, debt collection, debt recovery pre-action protocol, and dispute resolution could be on the cards.
In this article, we’ll be describing 10 of the reasons a business may fall into debt. Whether these reasons are good or bad, it’s important to know them so you can plan for the future of your business…
1. Unpaid Invoices
Starting with one of the most obvious reasons for falling into debt is unpaid invoices. Delayed payments from clients are a classic reason for a business to fall into debt.
Of course, making debt chasing a priority is the best way to solve this. This can be done through follow up emails and phone calls to insist on payment. That said, this might not always work immediately, so a fail-safe might be taking out a business loan.
Without this available finance, a business may be unable to pay their own suppliers and bills, creating a vicious cycle. A loan is a quick option to keep the business afloat.
2. Time Constraints
Lack of finance can mean that a business owner must make hasty decisions, with a lack of forward planning. This can have a detrimental effect on the business, which is why taking out a loan is sometimes a sensible option for some. This allows a company owner to stop, take a breather, and not have to make panicked decisions which may detrimentally affect the business.
3. Outside Conditions
Another classic hiccup for businesses is unavoidable market conditions which simply cannot be swerved. Whether it be poor health in your specific market, a financial crisis, or a pandemic, there’s plenty that might negatively impact a business. So, loans can be used to keep the company afloat during these troubled times.
4. Supplier Debt
Supplier debt is a way to finance a business with little to no cost incurred. It consists of not paying your suppliers until the end of the invoice due date, and in the meantime using that spare money to finance the company in other ways.
If utilized sparingly and sensibly, this can be a smart way to plan financially. That said, it has the risk of backfiring if you can’t pay your suppliers by the due date, and may lead to sour relations building up. This is why managing this sort of debt correctly is paramount.
5. Start Up Loans
It’s pretty common for businesses who are starting out to receive a bank loan. These are only made available to people who have a business plan in place, and aren’t just dished out to anyone and everyone.
In taking out a loan like this, you will be responsible for paying it back, alongside any interest along the way. So, it’s really important that you have a business plan that you’re confident in before taking the plunge.
6. Leveraging the Business
Leveraging a business using debt is actually a great reason for a business to go into debt. After all, by taking out loans and repaying them in time, you’re constantly building your credit score, and building equity value for shareholders.
Because debt can often be less complicated to arrange than equity financing, and may not require shareholder approval, it’s seems a no-brainer. However, if used in an unresponsible way, this can always backfire.
7. Debt Financing
Growing a company is extremely challenging, as it consists of a large amount of planning. You have to consider a variety of things, including:
- Fleshing out a business model
- Implementing customer service processes
- Defining the customer base
- Enhancing the product continually
- Implementing a marketing and PR plan
These are just some of the considerations a new business owner should be thinking about. However, funding for this isn’t often available, and can be stressful and expensive to obtain. For example, bank loans often require collateral, like property and equipment, and equity financing means giving up some ownership of the company.
Instead, debt financing acts as a flexible loan without requiring any of the above. This is why debt is factored in as a huge part of the finance plan for companies.
8. Equity Financing Removes Control
Maintaining 100 percent ownership of your business is important, especially at the start. Equity financing relinquishes some of this control from the company owner to shareholders. This is why it’s a smart plan to stick to debt financing, as you can keep all the hiring, strategy and expense decisions to yourself.
9. Cash Flow is Strong
We’ve talked about some of the reasons why a company owner might choose to fall into debt. Well, the truth is, debt can keep cashflow strong at the points when you need it most.
If the cash flow isn’t strong, business growth can’t be prioritized. So, debt can be a great investment in this regard.
10. Providing Employee Incentives to Work Hard
Making smart cash decisions within a business is all about investing in the future. Debt can do just that if used correctly.
Specifically, taking out a loan or extending payment of an invoice might be chosen if it means paying employees the correct amount for their work. If you pay them their worth, they’re much more likely to do great work, meaning the investment will become worth it.
Making these smart business decisions must be made with caution, but may just be the answer.
Falling Into Debt Should be Done Wisely…
As you can see, there are a number of reasons why a business owner may wish to fall into debt. Whether it’s a chance for quick cash, or allows you to make smarter, less panicked business decisions, there’s plenty to decide.
The important thing to remember is to make the right choices, and don’t fall into debt irresponsibly.
