Debt is a necessary – and even important – part of any company. But managing that kind of responsibility can also be scarier than a 6 a.m. boot camp class. Unless you were lucky enough to rely on equity capital (money raised by offering shares of ownership in a company, usually to friends or family), you were undoubtedly faced with the decision of how to pay for your ergs, free weights, studio space, air conditioning units and the many other expenses that are involved in getting your studio up and running. So whether you’re just starting out or you’re looking to expand your business, we’ve got some tips about staying on top of your finances.
You have several different options when you’re looking to spend money you haven’t yet made, and each one comes with a different set of risks and benefits.
Line of credit: these are sources of funds, generally issued by banks, that you can draw on at their discretion. Interest is only paid on the money that is actually withdrawn. They can be convenient, but banks can also withdraw lines of credit at any time – so it can be risky to rely on them consistently. These can be best for seasonal studios – if you’re an outdoor studio that only runs during the summer, you may want to look into a line of credit to get everything up and running before you’ve seen a big intake in revenue.
Credit cards: technically a type of line of credit, credit cards are distinct enough that they deserve their own category. They often offer rewards or benefits for spending money, but they generally come with much higher interest rates. Credit cards can make it easy to track your expenses, and the spending rewards make it appealing for you to use for you small-to-medium-size routine purchases. But make sure you can pay off the full balance every month, as the interest will always accumulate quicker than you can anticipate.
Regular-term loans: when considering these, many people tend to only look at interest rate. But an equally important component of this type of loan is the length – a one-year loan with a 10 percent interest rate means you’ll be paying a much lower chunk of money for every installment than a three-month loan with a five percent interest rate
Cash advances: going this route will get you money immediately (usually within one or two days), but the loans are very short term and tend to have extremely high interest rates, generally of 30-40 percent. Defaulting on this type of loan is extremely common, particularly as they are often used as a last-ditch effort for an owner to save a dying business. They should really only be used in cases of extreme emergency and not when a business has been struggling for a long time.
Managing all these different forms of debt can be confusing and time-consuming. And the stakes can be high, because you need to maintain a good credit history to take out any future loans. But successfully paying off your debts on time can greatly improve your credit score, giving you even more financial freedom in the future. Luckily we’ve got several preventative steps you can take to make sure your loans don’t get the best of you.
Build a relationship with your bank. The people that handle your money may seem like automatons, but the more comfortable they get with you and your business, the better. They can be great resources for ideas to help your business, and they can even facilitate introductions to vendors or suppliers that may complement your business. And if you’re slightly behind on your payments because, for instance, you’re a spin studio that gets less revenue in the summer, the bank will be much more likely to trust that your payments will be on-schedule again in the fall if they remember you personally.
Prioritize your payments based on both due date and interest rate. The easiest way for your debt to go from manageable to unmanageable is to push off your credit card payment, and all of a sudden that new $10,000 furnace for your Bikram studio that you bought a year ago is costing you $11,500.
Don’t hesitate to ask for flexibility or discounts from suppliers. Haggling is an underrated skill – you can draw on your good payment history to expand your credit, or you can buy in bulk for a lower price per item.
Keep an eye on your credit report in general. Errors can take weeks to correct, so you want to make sure all the information is up to date. If you’ve only been late for a month or two, your credit history shouldn’t be adversely affected, but more consistent lateness will make it hard for you to get a loan. If your bad credit is a result of a medical crisis or divorce, and you can prove that your credit was good before that event, loan issuers will likely be more lenient.
If you’re already floundering in the deep end of debt, don’t panic! Our advice? Don’t run away from your creditors. Let them know your financial situation, because the earlier you tackle a debt problem, the easier it will be to fix. You’ll still have the options of consolidating your loans or filing for Chapter 11 bankruptcy.
But the most daunting problems can be overcome with solid management decisions. Do a little preventative planning and some research, and you’ll be paying back your loans without breaking a sweat.