Like individuals, businesses can also suffer from poor debt management strategies and become insolvent. Insolvency is a major problem for many businesses where the account payables exceed the receivables. Here we share some debt management tips that can help you save your business.
What is Business Debt?
Before jumping into this discussion, let’s understand what business debt is and what it entails.
Some business models are lucky and rely on low or no capital to expand. Their expansion model is solely based on the cash generated through the business or high margin.
However, some businesses need money to expand their operations and grow. You can consider getting an investor if you have little or no money in your reserves. But It can be potentially dangerous because it involves losing control of your business.
That’s where the issue of debt comes in.
Loans are not necessarily bad as long as you put them into proper use. The distressed debt levels show that small and large businesses borrow money to finance their operations. According to research, the total debt for businesses in the U.S. stood at $2.28 trillion in 2021.
Why Does A Business Need Debt?
Here are the reasons why your business may need to borrow money;
- To expand office space.
- To purchase equipment and business assets.
- Pay for immediate expenses such as salaries and utilities.
- For working capital needs whereby you use advanced money to restock your warehouse.
How Can You Manage your Business Debts Effectively
Here are tips for managing business debts.
Have a Business Plan
Many businesses become debt-ridden due to a lack of a business plan or budget. A business plan summarises a company’s objectives, marketing strategies, industry standing, operations, and financial plans to enable it to avoid bumps along the way.
It’s important to have a road map of how and from where you intend to finance your operations. If getting credit from banks is part of your financing options, you should borrow within the laid down limits in your plan.
Including your cash flows, fixed costs, income sources, and liabilities in the budget is an excellent idea. With a solid plan, you can pay your suppliers on time and other expected costs, such as utilities.
Notably, don’t overlook your role in the business and neglect your personal expenses. It’s important to establish how much you should pay yourself every month.
Have Solid Cash Flow Management Strategies
Most businesses fall into cash flow management issues and pile up debt. You can improve your cash flows by;
- Evaluate planned vs. actual costs to identify variances. If there are positive variances, it means you’re doing good in cash flow management. But, if it’s negative, you may need to revise the forecasts to match your cash requirements.
A negative variance may mean you’re having trouble managing your short-term expenses, which can lead to overborrowing and indebtedness.
- Pay your suppliers on time and review credit terms with your customers. It helps prevent cash flow problems by ensuring quick cash collections.
Besides, paying your suppliers on time improves your credit history and enables you to qualify for more credit facilities, such as invoice discounting. You can set payment reminders for overdue bills and have an automated cash collection system for reminding your customers when payments are due.
If you’re having trouble paying your suppliers, negotiate longer periods to settle the debts.
- Improve your inventory management system by ordering small quantities to avoid having dead stock.
Cut down on unnecessary expenses to free up extra cash. After improving your cash flow, plan on how to allocate the freed-up resources. You can identify savings areas as long as it doesn’t affect your business objectives.
Review Current Debt; Think About Consolidation
You may often find yourself in a debt crisis if you have many loans to pay. Luckily, debt consolidation is an excellent idea that can greatly improve your cash flows.
The first thing to do is review the outstanding debt and list every loan from the largest to the smallest, which may include;
- Working capital loans
- Credit cards
- Supplier payments
- Tax obligations
- Asset finances
- Invoice discounting.
After reviewing your debts, approach your creditors or lending institutions and negotiate a review of payment terms.
For credit cards, consider adhering to the 30% credit utilization rule so that you don’t exceed your limit.
You can start by reviewing your loan terms and asking your lender to refinance the existing debts. If you borrowed previously when the interest rate was high, and now it’s low, you can save money through restructuring.
Worth noting that fixed interest rates don’t change over time; when converted to variable interest rates, you can enjoy lower rates for long-term facilities. Nonetheless, this option is only viable if you have a good credit score and an excellent payment history. To avoid surprises along the way, always request your free credit report to identify issues that may impact your score.
Improve Your Revenue
Think about other ways to improve your cash flow, such as increasing your revenue. It can be a long-term strategy that may bear fruit in the future. You may need to take radical steps to cut down on costs, such as downsizing your team or closing down costly units or branches.
Identify loss drivers that may be eating into your revenues. Take appropriate action, sell some idle assets and pay off existing debts.
As the adage notes, prevention is better than cure. If you are in a debt crisis, stop taking out more loans, restructure the current ones, operate within your business means, and pay the current liabilities on time. Getting out of the debt pitfall may take time, but every long journey starts with a step.