Do you spend sleepless nights worrying about your business debt? If you do, then you’re not alone. Small business owners find it extremely difficult to manage their current debt. The fact is, handling debt can be one of the most difficult challenges a small business owner can face.
Fortunately, there are ways to avert this type of financial challenge. Here are a few helpful tips to control your debt before it controls you.
1. Do your homework before taking a loan
It’s important to calculate your debt coverage ratio before you apply for a loan. This will determine how easily you will be able to pay it back. Debt coverage ratio is also one of the yardsticks used by the lenders to determine the amount, interest rate and the terms of a loan.
Your inclination may be to convince a bank to give you a large loan, but play it safe. If a debt coverage ratio suggests that the loan you are seeking will be a stretch, then there is a good chance you will struggle to make your loan payments.
2. Increase cash flow to pay down debt
Being in debt is not the ideal state. So, for most businesses, paying down debt should be a priority. Here are several ways to increase your cash flow to pay down debt.
• Increase productivity: Building efficiencies in your business or finding new ways to generate revenue can be sound strategies for increasing cash flow. Increasing employee skills through training or introducing a new technology can be great investments in productivity and increasing profits. New marketing initiatives can also increase the bottom line. Granted, this may increase costs in the short term, but a well-thought-out marketing plan can increase your profits, which in turn, can be used to pay down debt.
• Renegotiate terms with vendors: Proper management of accounts payable can significantly increase cash flow and accelerate your ability to pay down debt. Many suppliers will offer payment terms of 15, 30, 45 and even 60 days after the delivery of goods and services. Conversely, you may be able to negotiate an early payment discount – early payment discounts can be anywhere from two to ten percent. Finally, periodically, shop for new suppliers that will offer you better pricing. These are all great ways to increase your cash flow.
• Optimizing inventory turnover: Stagnant or access inventory can drain your cash reserves. Inventory should be closely monitored and be purchased “just-in-time” for anticipated demand. If possible, work with suppliers that offer consignment inventory or rights of return for unsold goods.
3. Reduce Expenses
Once you take stock of your budget, take a look at your operating costs. Do you have any excess expenditures you can do without? Decide which services and operations are absolutely necessary for the daily operation of your business, and cut the rest.
Ask yourself the hard questions. Do you pay for subscriptions you rarely use? Are there professional memberships you can temporarily suspend? Could you potentially negotiate reduced prices and flat rates with certain vendors? Even little things can add up into substantial business debt.
Use your financial statements to help pinpoint expenses contributing to your debt. Cutting costs is a sure-fire way to increase cash flow and reduce surmounting debt load.
4. Think outside the box
Simply put, the more cash you can generate, the faster you can reduce your small business debt. These are just some suggestions that may help you increase monthly income to your business:
• Diversify. Can you add an additional product or service to your current offering? Are you reaching all potential customers through targeted marketing? Are there any untapped niche audiences you haven’t considered?
• Raise your prices. But just enough to maintain the same amount of sales. Be sure to communicate to existing customers before you raise prices, and ask if they’d like to order anything before the change is in effect. This could result in a much-needed bump in revenue anyway.
• …Or lower them. Offer mark-downs on merchandise and discounts on services, especially for loyal and repeat clients in an effort to boost sales. Just make sure not to slash the prices too much that you won’t make up lost cost with increased sales.
• Get what you’re owed. Ramp up accounts receivables by following up on late payments from customers. You can even present your clients with discounts or rewards for paying fees upfront.
• Upsell. Is there a way to sell more to your existing customers? Can you offer any incentives or bundle your existing products or services in a way that would entice people to buy more from you? A quick email with a flash sale, a limited offer, or subscriber-only deals could do wonders to increase your monthly revenue.
• Optimize inventory. If you have inventory that isn’t selling, see if you can adjust your purchasing habits or look for suppliers that will offer rights of return for unsold goods. This will free up both physical space and room for more inventory that might actually sell and increase revenue.
• Sell your surplus. Look at the things you don’t use—or don’t use to their full advantage—and sell them to people who might. Is there another business that could buy a portion of your company you no longer are passionate about? Note that you should never sell anything you’ve put up for collateral on existing debt. That’s straight-up fraud and could have serious legal ramifications.
• Get scrappy. What else can you do to make a quick buck? Maybe you can lease out a portion of your office to another business? Could you save on rent by working remotely? Get creative by generating additional revenue from your existing assets.
If all else fails, you still have options. For businesses that can’t manage their debt, it might be time to think about selling the business or liquidating all assets. But hopefully it doesn’t have to come to that, and hopefully, you’ll have pulled yourself out of a sticky debt situation using these simple steps before that happens.