Debt is a necessary part of today’s business world. A loan, line of credit or a business credit card can help you take your business to the next level. But without proper planning and management, debt can compromise your cashflow and put your business at risk.
However, even the best entrepreneurs can get overwhelmed with business debt. Despite careful planning, unforeseen circumstances and events – such as natural disasters and pandemics – can throw a spanner in the works. If you fail to pay business debts, you might suffer consequences such as loss of employees, seizure of stock, costly court cases brought by your creditors, and damage to your reputation.
If you are facing mounting debt in your small business, it is time to put a debt-management plan into action. Here are some tips to help you create an effective strategy to control and eliminate business debt:
1. Make a Debt Inventory
The first thing you should do is make an inventory of all your debts. When you aren’t keeping track of what and who you owe, it is all too easy to miss repayments and accrue fines. You can use a spreadsheet of a debt-management app to make an inventory of all your debts, their varying due dates and interest rates. Your inventory should include all debts such as business loans, lines of credit, and outstanding payments due to vendors.
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With the information laid out clearly on a spreadsheet or app, you will have an easier time identifying which debts you should prioritise. Experts recommend starting your debt-repayment plan with the debts with highest interest rates. Other than that, you can focus on the smallest debts first to get them out of the way.
2. Refinance or Consolidate Debt
Two effective ways of dealing with high-cost business loans is by either refinancing or consolidating. Refinancing is when you take a new loan to pay off an old one. Refinancing often gets you lower payment terms and interest rates.
On the other hand, consolidation is when you take a loan to pay off multiple smaller loans. This helps you combine different lines of credit loans into one account, making it easier to manage. Debt consolidation also changes your payment terms and may reduce your interest rate. The downside is that you will have an extended repayment term and might also end up paying more in the long term.
Although debt-consolidation and refinancing are effective tools, they can lull you into the mindset that you have room to acquire more credit. Bear in mind that the main goal of this exercise is to reduce or eliminate debt, not to get you further into debt.
3. Consider Cost-Cutting
To find the funds you need to reduce your debt burden, you have to cut down on unnecessary expenses. Go over your business budget to identify any expenses that you can do without or reduce. Look at the purchasing and inventory methods, purchasing systems, office expenses, and shipping costs and update your budget with the necessary changes.
You can easily cut down on the cost of office supplies or cleaning without compromising your business operations. Many small businesses invest in office supplies, only to have them gathering dust in storage. If you have excess office supplies such as notebooks and pens, consider selling them to pay off debt.
Additionally, you don’t have to go for the most expensive brands when purchasing office equipment and supplies. For instance, you can buy second-hand laptops or furniture. If need be, you can upgrade the items once our company is in better financial standing.
You might also want to consider downsizing to a smaller office. If it is suitable for your business, having employees working from home or switching to a home office may help reduce your operation costs.
4. Boost Your Earnings
To pay off your debts and continue to grow your business, consider ways to boost your cashflow and earnings. One way to do this is by increasing your sales. You can do this by increasing the prices of your products and services, advertising on social media, and rewarding loyal customers.
Look for ways to improve your collection strategies for a more predictable cashflow. For instance, if you have a payment period of 90 days, you can shorten it to 30 days. Fine-tuning your invoice collections in this manner will ensure your clients pay you in time, enabling you to pay your debts in time too. Consider offering clients discounts for early payments and charging penalties for late payments.
5. Talk to Your Creditors
Dealing with creditors is an important skill that every entrepreneur should learn. Understand that creditors aren’t your enemies and they don’t want your business to fail. Just like you, they have interests to cover. Instead of going silent on them or antagonising creditors, you can talk with them and negotiate more favourable repayment terms.
Be open about your current situation and together, come up with a suitable repayment plan. Remember, resolving the debt is also in their interest. Some lenders might even reduce interest rates or increase your line of credit to enable you to get over a temporary financial setback. Once you and the creditor agree on a new repayment plan, do your best to not default.
