Debt can spiral out of control quickly and affect your business in ways you never even imagined. That’s why small business owners must educate themselves on debt management techniques to handle the situation appropriately. From effectively budgeting to planning for emergencies, there are many different ways you can ensure a healthy business without risking the financial stability of your company.
Many small businesses have difficulty managing their cash flow. Owners and managers can work with lenders to get timely cash and postulate several solutions. Small business owners need to approach this subject with an open mind. Making assumptions about your debt management plan is never a good idea, as assuming the wrong thing could leave you in debt for much longer than necessary.
Debt Management for Small Businesses
Small businesses deal with debt management every day. When you need cash, lenders can help you find solutions to get it quickly. Don’t assume that managing debt is the same as asking a friend or family member for money. When you postulate solutions with your lender, they will explore all the long-term and short-term options to help you seek debt.
What Is a Debt Management Strategy?
The term debt management has become popular in recent years. It often refers to a group of financial tools that help you manage your debts as one unified strategy within your business. This strategy could include trusting the credit card company, paying interest-only payment plans, and borrowing money from family and friends.
The choice is entirely up to you and your business practices. How it works for you will depend on your business, how much money you’re making, what other debt/debt management options you have, how well you manage your debt on top of your business debts, credit scores, and more.
The Best Debt Managing Practices for Small Businesses
Paying Off Credit Cards
Credit cards are often used as a business tool. You can use them to purchase office supplies, equipment, and many other items you need for your business. The good news is that some credit card companies will let you put down a “security deposit” when you open your account, which prevents you from spending more than your credit limit on any given month.
This is great, as it protects the business from any significant debt spent in the first few months of opening an account. If you choose to use credit cards as your primary business tool, make sure that you keep this “security deposit” in mind at all times.
Setting Up a Revolving Account That Pays Interest Only
If you have multiple consumer debts that you don’t pay on time and as agreed upon, credit card companies can take legal action against your business. That is why it’s essential to set up an account that doesn’t charge interest. It means that there’s no risk of your business being charged for these debts. If you set up a revolving account that pays interest only, you don’t have to worry about paying back the interest charges. They will get reclaimed by the company for that month.
Building Cash Reserves
It’s important to note that when you have cash on hand, you are more likely to make well-thought-out decisions because of it. The same is true when managing your business and your debt. If you were to use an interest-only account and pay off credit cards in cash, you could easily see what your most significant current expenses are. You are more likely to make good choices that won’t affect the health of your business in the future. This means that you will never accrue debt without a plan for paying it off.
Using No-Debt Financing and Avoiding Taking on New Loans Without Collateral
Using this strategy takes some time, but it is one of the best ways to build a stable business with a good credit rating so that you can get more favorable rates on loans in the future. When using this strategy, it’s important to note that you have to know your limit. That means sticking to it as best you can when extending any credit for business purposes.
Using Fixed-Rate Notes From a Bank and Other Lenders
When you have a solid business with a good credit score, you can often get better rates on loans than many smaller businesses. This is because creditors often give larger businesses the benefit of the doubt. After all, the creditor knows that if they do not lend you money, you will be going elsewhere for it, and it’s most likely that their competitor will.
This means that you will be charged about 30% to 40% more than a larger business for every dollar you borrow. If you are willing to put the time into building your business, you’ll likely get a better rate of return on investments. This is because smaller businesses are more likely to be making smaller profits.
Increase Your Revenue
If you can increase your revenues and profits, then the pressure to take on the debt will be less, and it’s more likely that the company will be profitable enough to pay back all debts. Paying off or reducing debt with current revenues increases the chances of a positive cash flow overall.
Reducing Your Employees’ Pay or Hiring Part-Time Help
When businesses are having trouble paying their bills, they will often reduce their workers’ pay to make ends meet month to month. This can have a detrimental effect on business growth if done incorrectly. To build a strong credit score, you must find the right balance between giving your employees the pay they deserve while still paying the bills.
Paying Off Your Debts at a 5% or Higher Interest Rate Monthly
When you pay off credit cards or any other high-interest debt, it’s important to note that you are working on building a better credit score. That said, it is essential to pay the minimum balance on all your accounts as previously agreed. If you already have debt charged over 20% per year for interest and fees, it might not be worth paying them off immediately. You could better use an interest-only revolving account at 0% interest.
Debt management can be daunting for a small business owner. However, you can get help from professionals who know the local real estate market, the best options for financing your business, and what is most likely to work best for you.
Consumer Protection Group understands the needs of clients in debt. We educate the public on managing debt because we’ve been there. We know just how daunting it is. Contact us so we can work together towards your financial freedom!