Debt trap- the infamous term to which more and more businessman are falling prey. It is common for businessmen to get into the debt trap without even realizing it. Well, since it does not take too long for any businessman to fall prey to it, it is important for them to know about it and take the necessary steps to avoid it.
Almost every businessman wants to excel at what they are doing. They want to achieve things in a short time frame. And why not? The constant competitions keep them on their toes 24×7 and they undergo immense pressure. And then it begins!! The daunting pressure of taking the business forward and upwards often puts them into a debt trap.
It is important for the businessman to be practical and do not put any hard work or funds into plans that do not make any sense. So, before you, the business owner, get into the debt trap, let us help you know how to escape it.
Do the Math
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Whether you are availing a machinery loan or a working capital loan, it is important to do proper math before taking any financial responsibility. You must calculate all the EMIs and what are your potential upcoming financial commitments that will affect your loan repaying ability. And also how it will affect your other expenses, such as rent, utility bills, salaries and wages, etc.
Doing proper math will help you get a proper idea of your monthly spending.
Do you want to buy new machinery? Or want to buy a new shop? Expand to a new location? You must make a budget for all your wishes. A businessman may want to do everything to expand his business but it practically may not be possible for him to do all of it. The budget may not allow him to do so.
It is suggested to budget everything. You can draw an allotted budget for each of the tasks that are on your wish list. This will ensure that while you work towards taking your business forward, you will not lose the track of your finances.
Are already running on a couple of loans? Do you have to pay your creditors? Figure out the loans which are expensive and take the most of your monthly expenses. If there are any, then they are the debts that must be cleared immediately. So, it is important to prioritize repaying expensive debts first.
That said, it is recommended not to completely ignore the other debts and give full attention to a single debt. All you have to do is to prioritize all your debts and work towards closing the expensive ones first and then the others.
Do not add New Debts
Availing a business loan is necessary in case your business require additional funding. However, a number of loans running on you simultaneously may lead you to a debt trap. Having too many loans will surely not work out for you unless you have a disciplined repayment plan. Juggling between more than two loans is not a good idea.
So, do not add new debts if you are already running on a number of loans. You are advised to keep it simple and take one loan at a time. The key point here is to not to take loans more than what you cannot repay. Consider your repayment ability or you will find yourself in a debt trap.
Live within the Means
Often a businessman gets carried away and spend and invest more than what he can afford. It is not a wise decision to go overboard when it comes to spending and investment. If you are looking forward to availing a business loan, you must assess your requirements and not avail a loan of the amount which surpasses your requirements. The loan comes with interest cost, always remember that.
Also, if you are running on a business loan, it is advisable to use the money wisely and only for the purpose for which it was availed.
Think, Think, & Think
It is important to not just think once or twice but thrice when it comes to investment. A businessman must not invest in an impulse and at least think thrice before it. What the investment is for? Will it benefit the business? How much the business will earn because of it? Let your brain have these thoughts and find their answers.
It is really important for a businessman to stay away from the debt trap. In order to do that, he must know a few tactics about how to escape the debt trap. A debt trap can certainly be harmful to your small business. And now that know the tactics in depth, you surely can be more ready to face and escape it.