Not an easy job all running a small business. Small business owners are used to wearing many hats, juggling operations, customer satisfaction and competition all at the same time. Managing debt is one of the most difficult things to do in a business. Debt can quickly become overwhelming if not handled properly — whether a loan for starting the business, a line of credit for cash flow needs, or credit card debt.
The good news is that small business owners can manage their debt, alleviate financial stress and position their businesses for long-term success with the right strategies. In this blog, we will discuss practical debt management strategies organized specifically for small business owners.
1. Understand Your Debt Situation
In order to be able to properly control your debt, you need to know where you stand financially. List all of your debts, which includes:
- Business loan (term loans (short and long)
- Credit card balances
- Lines of credit
- Receivable or payable due invoices
- Any other liabilities
For every debt, you'll want to write down:
- Total amount owed
- Interest rate
- Minimum monthly payment
- Due date
Knowing what you owe will make it easier to prioritize which debts you'll tackle first and come up with a more realistic repayment plan.
2. Create a Realistic Budget
The backbone of good debt management is a well-prepared budget. Take a look at your business’s income and expenses. Group your expenses into fixed costs (e.g., rent, utility bills, salaries) and variable costs (e.g., marketing, inventory, supplies).
Next, get a good idea of your cash flow and find areas where you can reduce costs or switch funds from spending towards debt repayment. For example:
- Refrain from discretionary spends: Limit all non-essential costs like a lavish office makeover or over-the-top marketing blitz.
- Talk to your suppliers: Seek discounts or more favorable payment terms to release cash.
- Minimize inventory: Do not buy more than you can sell, and sell what you have to make sales.
By establishing a budget and following it, you will find yourself having better control over your spending habits and consequently being better able to manage your debt.
3. Prioritize High-Interest Debt
Not all credit debt is made equal. Debts which carry a high interest rate — credit card balances, for example — can escalate quickly if not managed. And, to pay as little interest over the long term as possible, focus on paying high interest debts off first.
One well-known approach is to use the debt avalanche method—eg making minimum payments on all debts apart from the one with the highest interest rate, which you try to pay off first and foremost. When your highest-interest debt is paid off, move on to your next highest.
Or, you can pay off the smallest debts first using the debt snowball method in order to start building momentum and motivation. Whatever works best for you alongside your experience and financial goals.
4. Consolidate or Refinance Debt
If you’re dealing with multiple debts at high interest rates, consolidating or refinancing your debt may be an intelligent step. Debt consolidation – which combined various debts together into one loan with a lower interest rate – could simplify your payments and reduce total interest costs.
In contrast, refinancing refers to swapping out one loan for another loan, but with better features like a lower interest rate, or a longer repayment timeline. This can ease your monthly payments and give you the cash flow you need.
Before consolidating or refinancing, shop around for offers the process from different lenders and pay attention to any fees or penalties that may apply.
5. Negotiate with Creditors
If you’ve been delinquent in your payments, don’t be afraid to contact your creditors. Most creditors are open to negotiating with small business owners to formulate more reasonable repayment solutions. You may be able to:
- Lower your interest rate
- Extend your repayment period
- Temporarily pause payments
Being ahead of the game by communicating openly with your creditors can save you from defaulting on your loans and hurting your credit score.
6. Build an Emergency Fund
Every business faces unexpected expenses, but they can be challenging to navigate. Whether it’s a sudden revenue drop, a major repair or an economic slowdown, having an emergency fund can help you weather financial storms without adding on extra debt.
Try to keep in a separate business savings account at least 3-6 months’ worth of operating expenses. Although it may take time to build an emergency fund, any contributions made towards this goal will eventually build up and create a cushion for your business.
7. Increase Revenue Streams
Increasing your company’s revenue is one of the best ways to manage debt. Seek Ways to Increase Your Income, Like:
- Diversifying what you sell or provide
- Asking existing customers to upgrade the or place more orders
- Pursuing opportunities in new markets or customer segments
- Starting online sales channels
The more revenue you generate, the more money you will have to pay off your debt, and invest in your business’s growth.
8. Check and Improve Your Credit Score
Your business’s credit score is key to your ability to obtain financing (and the terms of that financing). New lenders will offer lower interest rates and better loan options to borrowers with higher credit scores.
To improve your credit score:
- Pay your bills on time: Late payments can have a big impact on your credit score.
- Keep credit utilization low: Use less than 30% of your available credit.
- Check your credit report: Regularly check your credit report for mistakes, and dispute any errors you find.
9. Seek Professional Advice
If you are feeling crushed by your debt, contact a financial adviser or debt management professional to help you. These professionals can offer customized advice and assist in developing a debt repayment strategy that addresses the specific requirements of your business.
This will mean that not only will you have a reliable fresh set of eyes to find another methodology that may be implemented to improve business finances but also possibly learn new practices to boost earning-power.
10. Stay Committed and Patient
Debt management is not a short-term crisis—you must adopt a disciplined and consistent approach with patience and persistence. Rejoice at small milestones on the journey, like clearing a credit card or shrinking your total debt load. So, don't forget, with each step you take to tame your debt, you're one step closer to financial freedom, and ultimately, financial success!
Final Thoughts
Debt is a standard aspect of business for a small company, but it can become a burden. Being aware of your debt situation, budgeting, emphasizing high-interest debt, and methods like consolidation and negotiating, you can take charge of your finances and prepare a better future for your business.
Book your first consult today, and get ready to pay down debt? remember, the magic secret is consistency and flexibility. With time and as your business grows make sure to review and adapt your strategies to ensure you arrive closer to your final destination.
Now, you not only minimize financial anxiety with these debt management tips, but also build a strong base for long-term growth and success. Your business owes it—and so do you!
What small business debt management strategies have worked for you? Tell us about your experiences and tips in the comments!
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