Debt is nearly unavoidable these days. Students graduate from college with loans to pay back, and homeowners have mortgages hanging over their heads for years. Businesses are no exception to this trend.
Many small businesses in California struggle with debt. In fact, debt is a natural part of a business venture. It may even be good for a business, but healthy debt can quickly add up to a bigger financial problem.
There are many common reasons businesses accrue debt. Here are the top three.
1. Difficulty paying back small business loans
The majority of small businesses start by obtaining a loan. Whether through their bank, credit union or the federal Small Business Association, loans are a common way for business owners to finance their company.
And many business owners depend on these loans to achieve their dream. However, the average amount of a business loan is around $600,000. And as interest accrues on that amount, it can become a significant challenge to pay a lender back.
2. Poor economic and market conditions
Sometimes, debt struggles are out of a business owner’s control.
When the market changes, so will business. And when business shifts, profits might as well.
Lower profits can make it difficult for business owners to pay back:
- Business lenders
- Product suppliers
- Partners or third-party lenders
- Landlords or their rent
There are ways that business owners can plan for market changes. And usually, lenders are willing to renegotiate a repayment agreement.
3. Lack of business planning
Creating a business plan is a critical step when first starting a business. However, it is also essential for business owners to adhere to those plans. Disregarding the plan—or not establishing one in the first place—can cause businesses to run into significant financial issues.
Debt is not inherently bad in the business world but recognizing the common causes of debt can help business owners reduce the risk of debt struggles and create a plan to help them manage business debts effectively. Filing bankruptcy is also always an option for business owners to relieve their debt and protect their business at the same time.