The experience of being in debt can be overwhelming yet challenging. Borrowing helps you accomplish a lot of the financial goals of your company. However, mismanaged debts don’t only affect the financial health of a business but also cause agitation.
Leverage is a corporate word that is often used in substitute of debt or loan. It refers to the borrowing of funds to finance different monetary requirements of the business, including inventory, transport vehicles, and several other assets. Entrepreneurs can either borrow debt or equity to purchase the company’s assets. Using leverage or liability increases the possibilities for bankruptcy.
Crawling out of a leverage trap isn’t a facile task. If you observe any leverage survivor company, you’ll notice wastage of time and opportunities. Debt seems easy at first, but we fail to foresee the joined obstacles. Here’s a list to determine the leverage crises and how to avoid them.
Credit cards:
Credit cards are like a two-edged sword. As a rule, if we purchase through a credit card without having enough funds, we’re supposed to make the payment from the next month’s income. If this payment cycle exceeds more than ten days, then the interest rate will pile up. That’s why financial discipline is essential while using credit cards. You must add a limit to your card, so you will never have to pay more than you can’t afford.
Emergency funds:
Some entrepreneurs are sensible enough to reserve a valuable sum of money equivalent to 6 months expenditure amount. The reason is to tackle any unforeseen obstacles. You should never use this amount in any situation unless your business is in a financial crisis, such as debt or a loan.
Avoid getting fascinated by luxuries:
Luxury can wait, but necessities cannot. Some companies tend to provide all the luxuries to their employees, including foreign trips and air-conditioned ambiance. However, it’s better to spend on luxuries when the profitability level reaches the maximum or when your company gets to save tons of money. In this way, you’ll get protection from the leverage trap.
Budgeting is essential:
By budgeting out your monthly expenses, you can wisely track where the cash is heading and where you can cleverly invest it. In case of cash crises, where you require a significant cut down of your expenditures, you’ll be able to consider the unnecessary commodities and services.
Limit the number of credit cards:
Multiple credit cards mean numerous interest rates. If you cannot repay the debt amount on credit cards, avoid using various credit cards at once. The more charges accumulated on each credit card can also mean more space to lose track of your revenue and expenditure.
Maintain a master sheet of expenses:
Always maintain a master sheet for tracking your expenses that contains room for correction so that you’ll be able to update it monthly. In this way, you can easily make timely payments in case of have multiple accounts or credit cards.
Avoid borrowing too much:
With time, you end up borrowing vast sums of loans with different maturities. An excellent way to protect your business from this leverage trap is to integrate multiple loans into a single one with slightly extensive maturity. You might have a longer EMI tenure, but your cash flows management is smartly done for now. Never hesitate to negotiate on interest rates and service charges. In the financial world, every charge is negotiable if you know how to persist.
Reconsider your priorities:
After having a deep analysis of leverage, you might create a priority list to rearrange your priorities. You may want to refrain from interfering in certain luxury items. You can either look for cheaper alternatives or avoid some purchases. It is the foremost step towards an optimistic financial situation. For instance, you can cut down your insignificant expenditures or idle machinery.
The most resistant part in trying to avoid leverage is to limit your expenditures and luxuries. Excess spending has become one of the most popular temptations in the present world of business. Through these strategies, you can keep control of the debt level while still having enough room for the prosperity of your company.
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