15 Tips to handle business debt like a pro

(Last Updated On: May 30, 2023)

Business debt is one of the many things a businessperson has to juggle. However, if mismanaged or ignored, debt can seriously impact your business and personal prospects.

Here are 15 pointers that will help you take control of your business debt.

Alert, assess, and act on your business debt

Your business can be affected by many factors and not all of them can be in your control. Issues along the credit chain, delayed payments from customers, altered government regulations, socio-economic changes, natural calamities etc. can all affect your business or revenue flow.

As a business owner, you have to be alert to the external variables – that is, factors other than what’s happening under your roof. Calmly assess the ways in which you can address the situation and work out possibilities to best mitigate the issue.

Here are some tips to help you manage your business debt

Avoid missing payment deadlines/EMIs

Not only will this affect your credit score; but it will also make sourcing loans a lot more difficult and expensive.

Maintain goodwill

If you are funded by private lenders or peer-to-peer (P2P) platforms, you need to maintain trust. Missing payment deadlines with vendors and other business associates could also hamper your potential to get good business deals and affect goodwill.

Optimise credit cards

If you are leveraging your business with plastic, avoid late payment fees and interest charges. Most credit cards charge between 36% and 48% as interest, which can be back-breaking for a small business.

You can also use your credit cards to save! You know the pain of business travel costs right? Book hotels, flights etc. at great deals. Here’s how Live From A Lounge has been enabling smart travelling; one loyalty point at a time.

Prioritise payments

Repaying lien-based debt and higher-interest loans should be your priority.

In case of default, you could end up losing business and/or personal assets. You may have sought financing multiple times for various purposes – funds for business expansion, brand building, stop-gap arrangement or cash flow management. These loans would be of varying amounts and different interest rates. Consolidating them would be a good thing.

Strike off small amounts

The interest outflow on small loans may not pinch much, but in the long run, these could add up to a large amount. Keeping track of small loans can also be a headache. Use a small portion of your cash flow to pay off these loans or look for interest-free loans from family and friends.

Refinance your debt

By taking a loan to pay off other loans, you can consolidate your debt with one or two creditors. You may also be able to negotiate better rates of interest and payment terms.

Just remember, this is a temporary fix. Do not get in deep waters!

Boost productivity

Debt coverage ratio (DCR) is a common benchmark to assess the creditworthiness of a borrower and determines the basis of the interest component and loan tenure.

You need to push for higher revenues, while simultaneously reducing the debt burden. Look for small changes that can help improve efficiency in business. Better planning systems and improved resource allocation can help save time and cost.

Cut costs

Small businesses tend to work on minimal resources; still, a penny saved is a penny earned.

See if you can cut down on power bills or reduce office overheads. It will help if you can operate out of a smaller place or a cheaper location.

Consider buying used machinery; it will work out much cheaper than buying new and can free capital for better utilization. But do make sure productivity and maintenance costs aren’t adversely affected.

Related read: 6 Secrets to Reduce Online Shipping Costs for Your Small Business

Optimise inventory

Improper material management can put a strain on your financial resources. Excess inventory not only blocks funds but also increases holding costs and added risk of loss via damage.

Negotiate with creditors

Creditors’ interests are literally and figuratively aligned with yours. They do not want your business to fail.

See if you can negotiate better terms – say, marginally reduce interest rates or improve terms of repayment.

Negotiate with vendors

Request longer duration on payment terms with your vendors, which will give you ample time to move funds around. Conversely, ask for early payment discounts. Even a marginal discount from a vendor can add directly to your bottom line

Negotiate with customers:

A shorter payment cycle from customers can significantly boost your cash flow and improve your ability to pay off debt. Consider adding late payment charges on outstanding invoices.

Liquidate assets

If an asset is not performing as expected or is expensive to operate, look to liquidate and better deploy those funds.

Raise interest-free loans

Pitch your business to family and friends for an interest-free loan. There are also online portals that help raise funds for fledgeling businesses at low or no interest rates.

Check out our free online course on “How to get funding for your business” on mojoVersity.

Invite investors

Debt financing is inherently expensive. Getting an investor on board who can bring in the capital and a certain amount of business experience in lieu of a small stake in your business is another good option.

There is no one-size-fits-all technique. You may have to experiment with different debt reduction strategies based on your comfort level and figure out what works best for you and your business.

But the final solution? Would be to ensure your business is thriving and you have a healthy profit margin that helps you pay off your debts. Want all the best tools in one place? Try out Instamojo.

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