Business debt is taken by an entrepreneur to use in funding huge purchases that they would not be able to afford under normal conditions. A debt arrangement means that the borrower is given money under the condition that borrowed money will be paid back at later dates. Most of the time, this is paid back with high interest. There can be different types of loans. Debt can be issued either to an individual borrower or to a business.
A service company is also a business, but it provides services instead of physical goods or products. There are various categories of service companies. An accounting firm that performs audits of other companies prepares income tax returns, and provides bookkeeping services to other companies is a good example of a ‘service company.’
Impacts of Debt on Your Service Company
Bankers and lenders will be more than interested in providing loans with interest to your service company. They will ask for your personal guarantee of a debt. This debt will work like a handcuff for you. Even if your service company fails, the lenders have all rights to receive the money-back for the loan from you, personally and legally. A few of these lenders who give away loans to small-sized businesses will take payments from your business checking accounts.
On a big scale, if a service company is growing fast and takes a small loan with a low interest rate, it is not necessarily a bad thing to do. In some instances, affordable debt is a good choice when running a service company. However, consider all the pros and cons before initiating a loan-taking process.
Grow Your Service Company Debt-Free
- Reduce expenses.
- Do not mix your personal finances with your business account. Start paying for the things you need, not want.
- Sacrifice rapid progress for steady growth: Many entrepreneurs aim to expand their businesses quickly. A small service company will grow more slowly without debt, but a debt-free business is still a better option.
- Never miss a chance to pick customers who give gross margins to your service company.
- Always know the precise cost of the services you provide to your customers. Never compromise on the price, as doing so could lead to your company’s dissolution or bankruptcy.
- Keep a strong handle on your business bookkeeping.
- Business operations must be routinely carried out for all companies, including service companies. Keep all accounting statements up to date and know where you always stand.
- Use your budget wisely.
- Never spend all your gross and profit margins. Fix a percentage of 30-40% of gross margin and 10% profit margin. Only spend in this range from gross margins. Do not distribute profit all at once among shareholders. You will need much of the cash to fund the growth of your service company.
- Use accounting software to keep your accounting system up to date and on top of your business game!
- Credit cards should be used minimally in small businesses as the loans will pile up quickly.
- Do not select your prices out of fear of going into debt. Know the actual cost of the services you provide and price accordingly. Overpricing may cause you to lose customers.
- Company leaders must be efficient, smart, and confident in sales, good at interpreting accounting statements, and fair to their employees. Such a service company will grow successfully.
Conclusion
Bigger is not always better. A debt-free and profitable service company is better. Service company owners must keep the debt financing option as the last priority and when it is needed. Debts halt the growth of small businesses. A service company ideally needs no debt to get started. Without debt, the business’s growth may be slower, but it will still be profitable. Using valuable strategies and techniques will help your service company grow debt-free.
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