Avoiding Debt When Starting a Business

By Damon Poeter

“You have to spend money to make money.” The new entrepreneur often hears this advice, mostly because it’s almost always true. But it’s possible to avoid debt when spending what’s necessary to start a business.

“One of the adages business school teaches is that debt is leverage. When people leverage up, they can supposedly invest more money, put more capital into the business, create a wealth engine faster by having that debt — that’s some of the prevailing wisdom in business schools,” says Matthew Angel, advice director of personal finance at USAA.

“But really, your risk increases a lot more, because the more you borrow, the more you limit your ability to take on more opportunities and weather downturns because you’re making debt payments.”

There are reasons to incur debt in business, but they don’t apply to every type or size of business, Angel says. Particularly for small one- to two-person businesses just starting out, racking up debt can be a mistake.

1. Take it slow.

“One of the easiest ways to start in a debt-free manner is to go slow,”  Angel says. “Is this venture something you can do part time? Keep your day job, but work your new business on the side. That allows you more flexibility in how fast you want to grow since you don’t have to earn a bunch of money right out of the gate to pay off debt.”

2. Separate your personal and business banking accounts.

This will help you to more easily track how much your new business is spending versus taking in. It’s also crucial to maintaining the financial integrity of your business and instilling financial discipline for your venture right off the bat.

“One of the easiest things a USAA member can do is use a DBA account that serves as a ledger for anything related to the business. All bills are paid out of it; any profits go into the account,” Angel says.

(A doing-business-as, or DBA account, allows you to use a name for your business other than your personal one.)

3. Focus on getting customers and sales first, and worry about advertising, marketing and other outlays later.

“When starting a business, the tendency of many folks can be to focus on things like renting office space, printing business cards, building a website, etc.,” Angel says. “But in the infancy stages, concentrate on going out and making money; gaining clients. You can backfill whatever service costs you need to pay for once you have customers giving you a revenue stream.”

4. Be wary of using a credit card to pay all expenses.

The fact is, there will probably be times when your business has to spend money it doesn’t have on hand in the present to make money in the future. For example, you may have to purchase software to complete a job for a client or buy tools to do a building project. Using a credit card to pay for such things as they come up is fine, but Angel warns against falling into the habit of using credit cards for all expenditures.

Using credit cards to run all of your expenses through can be tempting because it’s a way to help simplify your accounting,” he says. “But be mindful of the risk you take if you’re not paying them off every month. Be very wary of using credit to float yourself through the month. Small business income is not as steady as you’d always like, and you can get yourself into trouble this way.”

5. Dare to dream big.

Finally, you should keep in mind that if you do build a successful business, having too much debt can hold you back from growing it to fit demand.

“Think of your household — let’s say $400 a month goes to your car payment. That $400 can’t be spent anywhere else,” Angel says. “The same thing goes for a business. If your business is paying off debt, that’s tying up your cash flow. You can’t hire new employees. You can’t expand like you could if you didn’t have the debt load.”

Still have more questions? Contact a USAA financial advisor today at 800-531-8722. 

Matthew Angel serves as the advice director at USAA, focusing on the personal finance tenets of short-term saving and home advice. Matthew holds professional credentials including a CERTIFIED FINANCIAL PLANNER™ designation, AAMS® and a Master of Business Administration degree from the University of Texas at San Antonio. Matthew’s history at USAA includes seven years serving members as a financial planner and leading teams of financial professionals to help members achieve financial security.


The information contained is provided for informational purposes only and is not intended to substitute for obtaining professional financial advice. Please thoroughly research and seek professional advice before acting on any information you may have found in this article. This article in no way attempts to provide financial advice that relates to all personal circumstances.

USAA means United Services Automobile Association and its affiliates. Financial advice provided by USAA Financial Advisors, Inc. (FAI), a registered broker-dealer, USAA Investment Management Company (IMCO), a registered broker-dealer, and for insurance, USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # OE36312). Investment products and services offered by IMCO and FAI.  Life insurance and annuities provided by USAA Life Insurance Co., San Antonio, TX, and in NY by USAA Life Insurance Co of New York, Highland falls, NY. Other life and health insurance from select companies offered through USAA Life General Agency, Inc. (known in CA (license #0782231) and in NY as USAA Health and Life Insurance Agency). Banking products offered by USAA Federal Savings Bank and USAA Savings Bank, both FDIC insured. Trust services provided by USAA Federal Savings Bank.

Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.

250809 – 0318

Tags - Career

Article

What to Do with a 401(k) and ...

Article

When Is It OK to Make a ...

Article

Use this 15-minute checklist to prepare for ...