Smart entrepreneurs and cutting-edge start-ups have written a new economic success story. Fuelled by a highly successful information technology revolutions, start-ups have changed the way we live and operate. This has led them to become billion-dollar global entities within a few years. The entrepreneurs who founded them have become some of the world’s youngest self-made billionaires. Their growth has added trillions to the world economy and created millions of employment opportunities.
However, for every successful start-up, there are at least fifty, which did not survive. In this article, Ladder Advisors discusses a severe problem plaguing the start-up ecosystem- debt.
Start-ups and Debt Issues: An analysis by Ladder Advisors
According to Ladder Advisors, start-ups who think too much about debt, fail to have a forward-thinking approach. This impeded them from focussing on the strengths of their business. Being cautious about debt is one thing. Making it a deterrent from moving forward is another.
Ladder Advisors suggests that entrepreneurs and businesses should accept debt. Every business at some point or the other experiences debt. The reasons can be both created by the business itself, or be a result of some other unpredictable emergencies.
Another problem, which many start-up entrepreneurs commit, is not listening to financial experts. There are numerous financial advisory firms in the market, who can guide, aid and assist business owners and their businesses. By paying heed to financial advice, working out beneficial payment plans and going after low-interest rates, businesses can reduce or even completely overcome their debt problem.
Top Three Reasons Why Start-Ups go into Debt
1. Most Start-Ups do not plan for a Cash Reserve
One of the biggest reasons start-ups go into debt is because they do not create a cash reserve for troubled times. Sometimes when the business is going well, we never expect it to experience any problems. Entrepreneurs should always have a back-up plan when it comes to finances.
By building a steady cash reserve, every company gets into a healthy financial discipline ecosystem. This helps in overcoming turbulent times. It also helps in keeping the cash flow going as well as keeping a positive impact on the financial books.
2. Entrepreneurs and Unnecessary Expenditures
A shiny new sports car, a beach house and a vacation in some exotic la la land. Success does not mean burning through company cash. It is important for start-up founders to maintain a distinction between their personal finances and that of the company.
Some of the biggest entrepreneurs draw salaries like normal employees to aid the financial stability of the company. Not only will this set a healthy precedent in the company, but it will also show to future investors that the highest management is responsible.
3. Unplanned Growth Strategies
According to Ladder Advisors, most start-ups suffer from the problem of unplanned growth. A small example is hiring sprees done by startups, even if businesses are not available. Startups also depend a lot on future projections and trends to invest today and reap the benefits tomorrow.
While this may be a good growth strategy, it is sometimes best to step back and analyze your finances. This approach also helps in cutting down on unnecessary expenditure on growth and other additional elements.
A standard criticism leveled against start-ups is that they are fast and loose when it comes to financial matters. This has been amplified by massive hiring and firing sprees done within a short period.
By following the above pointers, startups can ensure that they stay away from bad debts. Can you think of some other ways by which start-ups can build financial discipline? Drop your answers in the comments section below.