Tips on Effective Debt Management for Business Owners
Updated: Aug 31, 2021
Debt is a necessary part of running a business. A business loan, line of credit or a business credit card can help your company hire new employees, purchase inventory, purchase equipment, and finance growth. However, too much debt can stand in the way of your business objectives and become an unsustainable expense. As such, managing debt is vital to sustaining your business operations and credit rating. If you find yourself unexpectedly further in debt than you'd like, here are some useful tips to help you take control of your debts.
Take Inventory of your Debt
Make a list of all the money you owe and to whom you owe it. Include the total amount owed, interest rate and monthly payment amount. This list should include payments on business loans, lines of credit, and business credit cards as well as outstanding payments due to vendors.
Taking inventory of your debt can help you prioritize payments. You may consider using the debt avalanche strategy or the debt snowball strategy to settle your outstanding balances. The two strategies differ over which debt you tackle first. In the debt avalanche strategy, you pay extra money toward the debt with the highest interest rate and make minimum payments on the rest. With the debt snowball strategy, you pay down the smallest debt first and then work your way up, regardless of the interest rate. There are pros and cons to each strategy, but they both help in paying off your debt. Therefore, the best strategy is the one you can stick to.
Renegotiate, Refinance, or Consolidate Bank Loans
Reach out to your creditors to negotiate more favorable terms. Proactive communication can go a long way to keep your situation manageable. Creditors are often willing to work with borrowers who are in a bind, especially when those borrowers communicate early. You may be able to extend the payment term of your loan, switch from a variable interest loan to a fixed interest loan, or even reduce the interest rate on the loan. All these options would decrease your monthly payments.
The Federal Reserve recently lowered interest rates to near zero percent. The lower interest rates decrease the cost of variable-rate debt, including credit cards and lines of credit. As a result, it may be a good time to refinance high interest rate debt with lower interest rate debt.
If your credit will allow it, you may also be able to consolidate several loans into one new loan. This would ease your repayment load as you wouldn’t have to worry about making multiple loan payments each month.
Reduce Spending and Increase Income
Minimizing your spending will free up extra funds to put toward debt and should also help you avoid new debt. Review all expenses and rewrite your budget to exclude any expenses that are not essential moving forward. Consider all business expenses including rent, utilities, suppliers, employees, equipment, etc. Review your expenses on a regular basis so you have a good idea about where your money is going.
Increasing revenue will also provide more funds to tackle down debt. Some cost-effective ways are to increase exposure through marketing campaigns using social media. Depending on your business model and customer base, you may also be able to earn more by either bundling products or reducing prices to improve sales volumes. Training your employees to enhance sales performance is another way to boost earnings.
If you have tried the strategies above and are still falling behind on your debt obligations, you may consider working with a professional to help get your debt under control. At CPA by Choice, we can help. We are available to answer your questions, feel free to call or send us a message.