The 4 Debt Traps That Keep Business Owners In The Red

Cash flow issues are rarely the actual problem - they are a symptom. Reaching for debt to fix a short-term cash crunch often triggers an endless financial spiral that can make you feel trapped. 

In this episode, Ilonka breaks down why debt itself is neutral, how your nervous system drives your financial choices, and the 4 debt traps business owners fall into that make debt feel like the only option.

Apply to work with Ilonka in The Wealthy Owner Private Coaching Program

Connect With Ilonka On Social Media
Instagram | Facebook | YouTube

Transcript

Copy

SPEAKER_00 0:00

Let's talk about date and the four traps you need to be aware of if you are a business owner who doesn't want to get into date or you are in date and you want to make sure that you don't continue the spiral. As a coach, I'm always noticing the patterns underneath the behavior, the thoughts and emotions that cause us to do the things we do. Now, similar to Android and iPhone users, when it comes to date, we usually have two camps of people. Those who believe that date is not a problem, that it's a tool that you can leverage to grow your business, and those who believe that date is bad, that there is no such thing as good or bad date. All date is date, and that you just simply shouldn't do it. Now, I don't personally do date and I don't want to owe anyone any money. And also, I'm actually quite neutral about the subject of date because, well, date is neutral. It's our beliefs about it that give it a charge. Our thoughts about it tell us that it is either a good thing or a bad thing. So whenever a client asks me whether I think they should go into date because maybe they want to grow, I always ask them why they believe it's the best path for them. Because that question uncovers the story behind the thinking, right? Behind the decision. It shows me whether they are reacting from the worst-case fears and maybe FOMO or deciding from a position of strength. Now there are typically two main reasons why business owners go into debt in the first place. The first reason is that you need to keep the lights on. Maybe you had a slow month, your biggest client cancelled, or they haven't paid you on time. There is a cash flow crunch, and you don't have enough money to cover the bills, buy stock, pay taxes. And when we get into debt from this place, it's usually out of panic. Our nervous system kicks in big time and our brain starts looking for the fastest path out of the fire. The second reason business owners go into debt is because you want to grow or scale, but you don't actually have the cash to fund that growth. Maybe you know that you need to hire someone, you might need to move into bigger offices, or you want to invest in Facebook ads. The bottom line is you want to grow, you need the cash to fund the growth, and then you may look at debt as an investment that you believe will yield a great ROI or return on that investment. Now, when we get into debt from this place, it's usually because of optimism, hopefulness, excitement. And in either of these scenarios, whether you're trying to keep the lights on or trying to grow your business, you actually have two options. You are at a fork in the road. Path A is to take on the date. Path B is to not take the date and look for alternative ways to generate the money. Path A is incredibly seductive, right? Because it promises immediate relief, not just from the problem in front of you, but also from the emotional discomfort of having the problem. The thing with date is that it is really easy to get into. It's incredibly quick. You can phone the bank at 9 a.m. and have the cash in your account by noon. And because it is so easy and so fast, you get that instant dopamine hit. You are out of the red quickly and you can finally breathe a sigh of relief and get onto the other things that are important. Path B, where you don't take on any debt, is a bit of a different story. This path requires you to become resourceful. It requires you to get uncomfortable. If you are in the keep the lights on kind of situation, this is where you actually have to look at how you got here. You have to investigate the underlying problem, not just the surface level symptom of not having enough cash. And this might mean you need to make some hard decisions, you have to have a few difficult conversations, perhaps even build a completely new set of money skills and habits. But this path is often the one we don't want to opt in for in the moment because it can feel slow and tedious. It doesn't give us that same dopamine hit or satisfaction of getting out of the problem quickly. But it does set a much stronger foundation for the future of your business because it shifts you, the owner, into a new level of leadership where you get better at solving problems in your business. Now, if you are going to use date as leverage, I want you to do it from a position of absolute power, clarity, and ideally financial stability. I want you to look at the terms, look at your numbers, and choose it because it genuinely makes strategic sense, not because you are in dire straits and feel like you have no other choice. I also don't want you to make decisions from an extreme emotional state. It doesn't matter if that emotion is a negative one like panic or fear or urgency over this cash crunch, or if it's a nice emotion like excitement, optimism, or the rush of taking advantage of a new opportunity. The one just feels better than the other, but both activate your nervous system. Both are emotions with high energy, right? And when we flood our nervous system with high emotional energy, logic is thrown out of the window. In both cases, your survival brain actually takes over in what we call the amygdala hijack. And in the amygdala hijack, all you can think of is instant gratification, whether that is relief of getting out of the pain or getting to the reward. Now we want to slow down and give ourselves some room to not just calm down, but also make intentional decisions. Now there are four traps I see business owners fall into that make reaching for path A, debt, to fix the problem easier in the moment. And the first one is the belief that money will solve all your problems. But here's the thing cash flow problems are almost always a symptom. It's never the cause. We need to look at what is causing the cash flow issue. Maybe you signed a client on terrible payment terms because you were scared to ask for the 50% upfront deposit. Maybe you underquoted yourself. Maybe you took on a client who's not an ideal client because you didn't want to say no to the income. The easy part is debt is instant and it requires zero confrontation with the real problem. You don't have to call the client and ask why they are late on payment. You don't have to admit that you underquoted and have an awkward conversation about raising the price. You don't have to say no to income, you know, is wrong for you. The credit card or the revolving loan solves the symptom in five minutes flat, with nobody else involved and no hard conversations required. That is the seduction. It's not that date is dumb or that you are dumb for doing it. It is that it's the path of zero friction compared to the alternative. Now, date doesn't fix cash flow problems long term. It just buys you another month of not looking at the real issue. And next month, that same cash flow gap is probably going to be there, except now you have interest on top of it too, right? The second trap I see business owners fall into is not having a cash buffer inside of their business. Now the thing to remember is that every business has inconsistent income. Even if you have recurring revenue, you will always have amazing months and months that are not so great. The problem is not the inconsistency. It is that you don't have anything sitting between you and the inconsistency. There is no cash buffer. And this is the equivalent of living paycheck to paycheck. One slow month, one client who pays late, one unexpected equipment repair, and suddenly you're reaching for the credit line. Now these bumps in your business are normal. It doesn't mean that there is something wrong with you or your business. The problem is that you don't have a cushion to weather the natural ups and downs. Without three to six months of operating expenses set aside, it's easy for debt to become the default option when something unexpected happens, which it always will. The third trap I see is some business owners are forever optimists. Now I'm not suggesting that you live in a constant state of doom and gloom, or that you should always expect the worst-case scenario. Optimism is great, but we need healthy optimism, which means we don't ignore the downside or pretend that it doesn't exist or will never happen. Because when you genuinely believe that next month is going to be better, borrowing against next month doesn't feel like a gamble. The forever optimist doesn't even entertain the idea that it might not work out because that is the equivalent of betting against yourself or perhaps even just giving up. The fourth trap is carrying the emotional weight and shame of debt or money problems alone. And if you have gotten yourself deep into a debt hole, chances are you feel guilty, you feel embarrassed, you feel ashamed. And what I see a lot of business owners do is they isolate themselves. They put on the smile and they don't tell anyone how bad things really are. And on top of that, we are flooded with the highlight reels of other business owners, of our friends online, and we think that it's just us, that we just suck at money and business. Shame, guilt, embarrassment are the kind of emotions that make you want to hide, right? They make you want to avoid the numbers because you already know it's only bad news from here. And this is usually also where the make money quickly schemes look very attractive and you do things you think will get you out of the situation quickly, but actually it doesn't. Now the good news is that getting out of debt is really just a decision. And that decision may be triggered by you just being sick and tired of the 2 a.m. panic attacks, or maybe because you've actually hit rock bottom where you've maxed out all of your options, all of the credit cards, all of the loans you can get, the banks don't even want to look at you anymore. And this is a pivotal moment. This is where you decide no more. Now there are actually five stages to getting out of business debt, and I am going to be covering those in next week's episode of the podcast. So if you haven't subscribed yet, do that now so that you don't miss it. Also, if you are ready to get out of debt faster with less drama and you would like support from me, I would love to help you. I have gotten myself out of serious debt and I have helped my clients do the same, and I know I can help you too. There is a link in the show notes where you can apply to work with me privately, fill in the application, and let's start the process of taking back control, not just of your business, but also your money. Thank you so much for joining me today. I will see you again next week.