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, 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 rating; 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.
- 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.
- 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.
- Optimise inventory: Improper material management can put a strain on your financial resources. Excess inventory not only blocks funds but also increases holding cost 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 the 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 fledgling businesses at low or no interest rates.
- 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 of 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 what works best for you and your business.
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