Debt Management Tips for Small Business Owners
Debt is not always something to fear. In most cases, it is a normal occurrence when running a business. Entrepreneurs may not always have enough funds to cover expenses such as purchasing new inventory, replacing equipment, or hiring new employees. Taking out a loan is necessary for such situations. There are different types of loans available to business owners.
While debt is a normal part of operating a business, too much debt can impede business growth or lead to bankruptcy. Thus, managing debt correctly is a priority and a vital skill for any business owner. Debt management can single-handedly make or break a business.
Hiring a Professional
Is it necessary to hire a professional for debt management? It may be true for large companies that deal with complicated loan systems.
However, small business owners can educate themselves about debt management. You can make concrete and doable steps to control debt without hiring the help of a professional.
Step 1: Creating a Debt Management Plan
The ultimate goal of debt management is to reduce debt to increase profit or capital to grow your business. To manage your debt correctly, you need to plan ahead. Taking out a loan from a bank or any financial institution requires research and preparation. This is also true for debt reduction.
This post will discuss specific debt management steps to consider when making your debt management plan.
Take note that your business situation is unique from others. It is alright to examine and consider the debt reduction strategies taken by other businesses. However, you should also create a debt management approach that will work for your business.
Here are other practical debt management tips for small business owners:
List an Inventory of all your debts
When managing debt or anything complicated, the key trait to possess is organization. You should be organized with relevant facts, data, and numbers to make smart financial decisions.
Make a list of the debts and loans you took for your business. The list should include data like:
- Loan amount
- Nature of loan (this includes credit cards and line of credit)
- Names of lenders or banks
- Interest rates
- Payments on loans and the required frequency (example: monthly payment)
- Outstanding payments to vendors
Use a spreadsheet to organize your inventory. It is also wise to list debts by interest rates. Listing your debt will help you put things into perspective. This inventory also helps determine which strategy to use to reduce your debt.
Choose a debt payment strategy
Once you are more aware of your present debt situation by making an inventory, it is time to choose a payment strategy. The two popular debt payment strategies are:
- Debt avalanche – this strategy involves paying extra money to the debt with the highest interest rate. The other debts will receive minimum payments.
- Debt snowball – this involves paying off the smallest debt first and then working your way up. This strategy does not consider interest rates. Instead, it is more focused on building psychological momentum for the business owner. Once you pay off the smaller debts, you build up the confidence to pay off the rest.
Debt repayment strategies have their pros and cons. You need to assess and decide which one is right for you. Most of the time, it is about picking a method that you will most likely follow till the end.
Consolidate your loans
In some cases, the terms of your credit or loan may not be the most favorable. For example, the bank or creditors could raise the interest rates for your current loans. In this happens, you may want to explore consolidating your loans.
Consolidating several loans into one new loan may make repayment simpler and easier. The new consolidated loan arrangement may also allow you to end up with a more reasonable interest rate and repayment terms. For example, you can consolidate short-term loans into one long-term loan.
Consolidating loans may also ease the pressure and stress you feel when repaying several loans.
Not all creditors will agree to consolidation, but it is worth giving it a try if the benefits to your financial situation are significant.
Refinance or renegotiate your loans
Creditors are usually willing to explore options with borrowers regarding paying off loans. After all, it works in their favor if debtors are willing to pay off the loan instead of defaulting or declaring bankruptcy. Communicate with your creditors and see if you can renegotiate the terms of your loans.
An example of a good negotiation is to switch a variable interest loan to a fixed interest loan. This switch enables you to pay less interest in the future.
Refinancing your loan may be a plausible option if banking institutions or the Federal Reserve lower interest rates. By refinancing, you can replace your high-interest- rate loan with a new loan that has a lower interest rate.
Cut Costs and Control Expenditures
As a business owner, you need to evaluate operational costs and business expenses effectively. These expenses may include rent, utilities, transportation, equipment, and employees.
A thorough evaluation of expenses allows you to distinguish essential costs from dispensable ones. Some expenses are easy to evaluate, but others need further analysis. For example, the types of leaves you offer employees can cost the business more than it should. Other ways to cut operational or admin costs include sharing expenses with other companies; downsizing office space and staff numbers; and selling off excess office supplies and equipment.
Spend management is as important as cutting costs. This practice refers to building strong supplier relationships and maximizing the procurement budget.
As a business owner, you must skillfully review your spending patterns and budget and see how you can free up extra funds. For example, you can ask long-term suppliers for deals and discounts whenever possible. Spend management can potentially free up some cash that can go towards debt.
Taking a loan or a line of credit to help operate and grow the company is normal for most small businesses. However, small business owners should not take on a loan without learning about debt management. An effective debt reduction plan is crucial to the survival and success of your business.
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