Women In Business

How to keep your business out of debt

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Debt can be a useful tool to help start and grow your business, but financial events outside of your control can take you further into the red than planned. Business loans, lines of credit, and credit cards all provide capital to spend on new equipment, employees and finance growth.

Despite the important role played by debt in the success of a business, too much debt can be detrimental for the future of any business.

We have created a set of questions to answer which will ensure you are well aware of where your business is sitting with debt. These answers should be able to provide you with insight into your current debt situation and from here create a plan to reduce and eliminate debt where possible.

1. Do you know the total amount of debt you are in?

With the hustle and bustle of starting a new business, debt can creep up on you and before you know it, it’s larger than what you had initially intended.

Before your business can start to be debt-free, you must answer these questions:

  • What is the total amount of debt that your business is in?
  • What kind of financial help are you currently receiving (business credit card, a line of credit, small loan, etc)
  • How many payments have been made towards these, and how many are left on the outstanding balance?
  • What are the interest rates you are paying, are they fixed or variable?
  • Are the payments coming out weekly, fortnightly or monthly?
  • Is your business cash flow healthy enough to service the quantum of your debt?

The aim here is to make an inventory of all your outstanding debt. By creating a repayment schedule that identifies the finer details (creditor name, amount of debt, interest rate, period etc.) will make the repayment process easier and organised.

2. Are you following up on late paying clients?

No matter what industry you are in, clients and customers are what keeps your business alive.

Late payments can be damaging to a business, however, in some industries, late payments are the norm and can be hard to avoid.

We suggest creating a list of outstanding invoices and contacting late-paying clients via phone or in person. These types of communications can come across wrong in an email, so it is better to have a conversation that way. Ideally, we suggest contacting those who are the most delayed with their payments first. Be cordial on phone and explain the client the urgency in a friendly tone.

In addition to this, you could look to revise payment terms for some or all customers:

  • Offer rewards to those who pay early or on time – this could be through discounts on products or future invoices
  • Charge a late-payment penalty
  • Shorten the payment period

Reminding customers to pay on time can adjust your accounts receivable strategy and release money that you can be put toward your debts. And remember not to bend too much backwards while revising the payment terms.

3. Can you consolidate or refinance existing debt?

Business owners can sometimes have many forms of debt and this means debt can be spread out over different payments schedules, each with their own interest rates and payment dates.

  • Consolidating your debt can combine multiple interest debts into a single loan with regular payments
  • Debt refinancing can save money by taking out a lower-interest loan to pay off the existing higher-interest loan

We suggest contacting your lender to see if you are eligible for either of these options. By consolidating or refinancing you can choose if you want the repayments to be fixed or variable and also choose the interest rate. This can give your business some breathing room and easily manage repayments through a single payment.

4. Are there costs you can avoid?

Setting up a business is generally where businesses tend to borrow the most. We suggest analysing your current business needs and goals to identify where costs can be eliminated or reduced.

Cost-reducing ideas can be:

  • Downgrading your unused office space to minimise the cost of rent
  • Working from a cloud computing system to save on IT costs
  • Using video calling instead of face-to-face meetings to save on travel costs
  • Negotiate with suppliers to see if you can get a better deal or look at alternatives and see if they are offering a cheaper price

What cost-cutting may do to your debt is that it can improve cash flow that can act as a cushion against the debt.

5. Can you increase your prices?

Raising prices on products/services can be a tricky task as these increases depend on the industry type, the market conditions and the customer’s needs. If prices are rising across the industry market then this could potentially be the right time to raise yours, however, this should always be discussed with your financial advisers. The aim here is to increase prices without raising your overhead expenses.

When thinking about increasing prices it is important to ask yourself these two questions:

  • Why are my customers going to buy my product if my competitor’s prices are below mine?
  • What differentiates my products from others? Is there a clear difference which will keep my customers after I raise my prices?
  • Is my customer getting the value for his money even after I raise the price of my product by certain percentage?

When done correctly, you may be able to increase cash flow without losing customer revenue.

Summary

For a small business, debt can sometimes be inevitable, however, borrowing money isn’t always detrimental as long as the money borrowed can be paid off by the business cash flow. Mounting debt can be the biggest source of concern for many small business owners, and very often, the reason for a business shutting down. There are many ways to avoid the debt trap, from simple fixes that bring in greater revenue to more-drastic solutions such as debt settlement. As with any business decision, knowing your options puts you in a stronger position.

About Ivy Lun

Ivy Lun is the Head of North Asia at InstaReM, which is a cross-border payments company, powering local payments to more than 55 countries across the globe. Ivy is passionate about sharing business advice with women and you can catch her on LinkedIn here.

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