A business costs money to set up and run. There are three sources of funding for business; owner savings, external debt and revenues. A business debt trap is the situation where the business over relies on external debt, and the revenues are unable to offset both the debt and recurring costs and expenses.
Read How To Avoid The Business Debt Trap
Many businesses die because they unfortunately cannot sustain the needed flow of cash into the business before critical revenues can meet minimum operating costs. The Business Debt Trap chokes the business limiting options for the owner while at the same time reducing his creativity by elevating stress and anxiety.
A lot of the situations leading up to the business debt trap can be avoided, by the business owner simply making sensible economic decisions based on common sense. If you don’t logically need it, don’t buy it. Put simply, the business owner should not indulge the business in expensive and nonsensical purchases and expense commitments.
While most business owners and those starting out have this understanding, an evil thing called ego creeps in and changes common sense replacing it with money stupidity. Most businesses will make the mistake of erroneously investing in large and beautiful offices before they have set up and run any effective marketing campaigns. A few months later when they cannot meet rent, common sense comes back and suddenly they realize they have no customers and consequently no revenues and profits and alas the business debt trap is here.
Who is most at risk of a Business Debt Trap?
The most affected business are usually in their infancy at the startup phase. The inexperienced business newbie makes a series of wrong decisions largely based on the optimism they hold for their business idea. Every new entrepreneur goes into business not expecting to fail. Most initial decisions are based on this belief. So when things start going south, the new business owner has so many over commitments for his precious resources that he drowns before learning how to swim.
Even the more mature business are not safe from this business debt trap phenomenon. Medium sized enterprises have the same problem but in a slightly different context. For them, the proof of concept for the business is already set up so the owner goes on holiday. Suddenly there is money for all the toys the boss always wanted and what is not available now can be financed and paid for later (When the money rolls in, of course).
Since the confidence levels are also running high, credit facilities are offered to customers but debt tracking is not really a big priority. Eventually most of the debt is forgotten and recovering the one that is remembered, is more expensive than the gain.
Read How To Avoid The Business Debt Trap
Large companies have the same problem as medium sized firms only in larger scale. The good news for larger firms is their business debt traps are easily and often politically covered; they have big enough owners to step in and sink more money as in the case of Kenya Airways, Mumias Sugar Company, just to mention a few recent Kenyan examples.
Can a business get out of a Business Debt Trap?
Yes. In fact most big businesses today are, or were once, owned by owners who got a taste of bankruptcy. I myself have been bankrupt, luckily without my creditors knowing, my employees knowing and even family, the point is, it is possible to get out of the business debt trap if you have the resilience, courage, creativity and knowledge on how to do it.
If you are in a business debt trap and don’t know what to do, just know that countless of other successful business owners have been where you are and made it. Information on how to navigate out is bountiful if you know how to look for it.
If you are not in a business debt trap or have never been, count yourself very fortunate and invest in systems and real world business knowledge to prevent getting into a business debt trap.
By incorporating moderate spending, enough of the capital can be preserved and used for the most vital activities thereby preventing drowning.
For more advice on dealing with the debt traps or avoiding it, please contact me, I can help.