The average small business owner would tell you to avoid debts at all costs, debts are seen as a sign of approaching business failure and that is not always a correct view. Entrepreneurs would most likely encounter debt in their startup, it is a common and even necessary aspect of running a business. The differentiating factor between how debt affects your business, whether negative or positive, is determined by how you can manage it.
Debts can be classified as good debts and bad debts. Small business owners mostly deal with bad debts and as such, they have a wrong perspective about debts generally. However, certain debts may even be beneficial to your business, these are referred to as good debts. A quick way to set apart good debt from bad debt is to answer the question of whether incurring that particular debt would help scale and grow your business.
In an instance where a small business you have a large inventory order to fulfill but cannot cover the expenses with the flow of cash in the business. It would help your business to consider applying for an LPO financing loan and that would be a good debt to incur. Likewise, a scenario where your business is unable to pay back and has to keep taking out separate loans is a cause for concern. This is why debt management skills are important and small business owners should. Let’s discuss some of how you can manage your business debts.
- Make a Debt Inventory
This involves making a thorough and absolute list of all the business debts you have. Write down every creditor and how much is owed, including the interest incurred and the monthly payment agreed upon. You have to be sincere with yourself when making this list and be sure to write down everything. Then record all of that in a spreadsheet and create an order of priority for which debt needs to be paid back first, you can go from the smallest to largest or according to the level of urgency. This inventory helps to track your debt and also shows your progress during repayment.
2. Cost Cutting
One of the ways to reduce the load on your credit is to cut costs, you need to identify areas of unnecessary expenses that can be done away with. There are lots of different ways to cut the costs in your business and the most common one to consider would be downsizing. It might be an unpleasant option but necessary to save your business from drowning in debts. Splitting some office costs, reducing or subletting your office space, and selling off or renting unused or underutilized office equipment are all different ways to downsize to reduce costs. Doing this frees up more funds to be channeled into debt repayment. You can decide to acquire all these back when needed after your business debt is repaid.
3. Boost Sales
This is another great way to manage your business debt. When there is a large debt on your business, you need to work on increasing your revenue to help your business cash flow. There are methods to boost your short-term revenue just enough to pay off debt and get your business back on track.
- Offer your customers discounted prices: this is a quick way to improve your cash flow by offering reduced prices for volume purchases. A promotion is a good way to attract sales and get more customers.
- Engage your customers through social media: Get to know your customers better to tailor your business to their specific needs. Closely monitor your social media for online reviews and address concerns immediately. The level of trust in your business has a direct impact on sales.
- Reward your loyal customers: Carrying out loyalty programs helps to retain your customers and builds customer satisfaction. Reach out to your audience and develop a loyalty program that would push revenue and is cost-effective. Do not create more unnecessary expenses.
4. Consolidate Loans
It is possible to consolidate loans and this simply means rolling all your loans and debts into one payment. This is a good way to reduce monthly payments and protect your business credit score. Choosing to consolidate your debt is not a decision you make solely as you have to discuss with your creditors and agree to it. This option helps you reduce the monthly interest amount and relieves your business of the pressure of having to meet up. You can consolidate several short-term debts into a single long-term repayment plan. Loan or debt consolidation is not a common method in Nigeria as it requires an agreement with your creditor which does not always work.
5. Raise Funds to Payback
This might be the last resort for some businesses as it will not be an easy task. Raising funds to repay a debt shows that your business is in a financial crisis and not a lot of investors would be willing to take that on. Those that do might request for higher percentages of your business just to ensure they get returns on their investment and that may be unfavorable for you as the owner. Another option is to borrow from family and friends which would get you fair interest rates but might also put a strain on your relationship with them. Liquidating your assets might be the best option to raise funds for repayment.
Remember, there are good debts and bad debts. It is a two-sided coin for small businesses. It can provide opportunities to improve your cash flow and scale it upwards while keeping the entirety of your business to yourself if you are not ready for an investor. Similarly, bad debts can be bad for your business and drag you into bankruptcy. Learning to manage debt is an important skill an entrepreneur should develop as it helps in the running of your small business.
With the right loan, you can take your small business to the next level. BizNurture provides several small business loans with considerable interest rates and repayment plans. Visit us today at www.biznurture.loan for more information.