Owners of small businesses know the difficulties that come with managing debt, due to small and limited resources. As a matter of fact, that is probably one of the harder problems that young entrepreneurs face. The reality is that businesses declare bankruptcy when debts get piled up, because it really is no easy way out. But if you know where the most common traps lay and how to avoid or get loose from them when they start causing trouble, then you can control your business debt before it starts controlling you.
- Do Your Research Before Taking A Loan
Business owners take loans in order to boost their cash flow. By dividing your net operating income by the interest and total debt service (principal payments of your debt), you will get your debt coverage ratio. This is the most common method of calculating it, and a ratio of 1.15 and above is considered optimal by most of the commercial banks. If it is under 1, then you should consider taking a loan. However, if your debt coverage ratio is not that good, than you will probably struggle to make loan payments. Play it safe if seeking for a large loan.
- Cash Flow Increase
Your cash flow can be increased in several ways, and these are some of them:
– Renegotiating terms with vendors. You can get payment terms of 15-60 days after the goods and services are delivered, or you can negotiate a discount for making an early payment (2-10%). Find new suppliers that offer better pricing. Your cash flow can be significantly increased by proper management of accounts.
– Increasing productivity. By increasing productivity, you increase profit. Introduce new technology to your production process, increase your employee skills, or devise a new and better marketing strategy. Increase your cash flow by building efficiencies in your business.
– Recover debts. If you cannot avoid bad debts in the first place, put an additional effort in collecting them. List the due date on every bill you send, send reminder bills, and keep contact with your debtors. Contact them every 15-30 days, and if it seems that they will not pay up sometime soon – discontinue delivering goods and services to them. If nothing else works, then seek a debt recovery agency from Sydney to do it for you for a certain fee.
- Future-Proof Debt
It may happen for your interest rate to rise, and that is not good for your business, especially if your debt is high and loan variable. If it happens that it goes low, consider locking in a fixed rate interest loan before it goes up. This means that the lender will maintain that rate for a certain period, and you will pay the lower one even when it rises. It is important to know whether you carry fixed or variable loans.
- Consolidating Debt
One of the quickest ways to lower down your interest rate and speed the process of paying down your debt is consolidating it. Consolidate all your debts in one low-interest loan, instead of paying different debts with varying interest rates.
- Ask To Lower Interest Rates
Paying a 15% interest on a loan is simply too much, and that is where the national average APR (Annual Percentage Rate) was in 2015. It often happens that businesses have a big credit card debt, but instead of dealing with it by making balance transfers, you can simply ask for a lower credit card interest rate. Anything is possible for long-term customers who pay on time and have a good credit score.
Explore all your options and always have your financial resources in sight. Remember that decisions you make now will affect your future finances, both business and personal. Reduce your spending where it is possible, increase productivity, and never try spending more than you have.