Startup businesses can have a tough time getting off the ground, especially when they take on commercial debt that they’re unable to clear. But why might this happen?
If you’ve started, or are thinking of starting, a business, you need to be aware of the potential pitfalls of commercial debt.
This debt can come on quickly and needs to be addressed before it gets serious. If you’re already at that stage, speaking to experts in commercial debt recovery is your ticket out. the question is, is this a reality of start-up businesses, and what are the main reasons for it?
In this post, we’re going to help you avoid the liquidation of your startup business by discussing how commercial debt typically destroys new businesses. This way, you’ll know what to avoid.
What Are the Common Causes of Commercial Debt for Startups?
Startup businesses can acquire commercial debt in various ways, and if it becomes too much to resolve, it may force them into bankruptcy. Not everything on this list of ways startups acquire debt is in your control, but they can be monitored carefully. Take a look…
1. Poor Market Conditions
Of all the causes on this list, market conditions are the least in your control. To avoid getting into debt for reasons unrelated to the running of your startup business, keep your eyes on the market.
Especially in the era of COVID-19, where markets have been reshuffled on a massive scale, you need to know where your industry stands. A slow economy can lead to reduced revenue, and a large shift in the market can alter customer preferences, especially in niche industries.
Some key things to keep an eye on are:
- Interest and exchange rates: these have an influence on the general trading climate and can affect certain industries more than others and at different times.
- Your competitors: this includes your existing competitors and any new competitors who enter the scene.
- New technologies and innovations: these could change the market around your industry or reduce the demand for a product or service you provide.
2. Lack of Funds
One of the easiest ways to get your startup business in commercial debt is by taking out startup loans. All businesses need a cash injection to get off the ground, and loans are the most popular way to get it.
The issue is, lenders can be fickle when you ask for additional loans, and without them a lot of startups end up filing for bankruptcy. Even short-term financing can build up over time, causing high debt and interest rates which eat into the company’s profitability.
Some startup businesses can use debt to their advantage, especially if the company is doing well. But, if they get to the point where they’re not meeting growth forecasts, their equity becomes a ticking time bomb.
You can see the number of business who fail to make their commercial debt repayments when you look at the UK. Since 2012, Startup Loans UK have provided 45,618 loans to startup businesses, with an average of 30.2 percent defaulting on their repayments.
3. Poor Planning
Not planning your startup business properly can lead you into commercial debt. You need to know what your target market is, if your business is in the right location, how much to charge for your service to earn more than you spend, and more.
If this sort of work isn’t your wheelhouse, hire someone to do the financial planning for you to make sure your startup business will be profitable. Do this before you go out and get loans and funding from investors, as a minimum.
Once you have that plan in place, it’s up to you to implement and follow it on a day-to-day basis. The plan might change based on market fluctuations and other factors so, at every turn, make sure your numbers are accurate and you know what you can afford.
4. Mismanagement of Cash Flow
Even if your startup business is profitable, and you’ve gone to great lengths to create a fully costed financial plan, you have to carefully manage the day-to-day cash flow.
There’s always the chance that you’re missing a payment to a creditor, taking on more stock than you can sell, invoicing late, and performing other poor accounting practices. This mismanagement will come back to bite you and could turn what looks like a profitable business into a failed one.
Some issues aren’t completely under your control, such as unexpected loss of employees, lawsuits, illness, divorce, and unforeseen disasters like COVID-19. However, if these things happen, and you’re also mismanaging your cash flow, the impact will be much more severe.
Can I Avoid Commercial Debt with my Startup Business?
In this post, we’ve managed to cover the most common ways startup businesses acquire commercial debt, and how it can lead to their downfall.
Knowing how your business can fail will help you avoid it. Learning from the mistakes of others is how businesses, and human beings, grow and develop without having to fail multiple times to be successful.
Monitor changes in the market, keep on top of your debt and only take on debt you can afford. Also, plan your finances carefully ahead of time, and manage your day-to-day cashflow to make sure there aren’t any payments you’re missing. Good luck!