If you effectively manage your business debt, doing so would increase the survival of your business and continuously increase the growth of any company. This is particularly true in Canada and the US where economic fluctuations can significantly impact business operations.
If you have business debt, if you manage it prudently, it can actually serve as a strategic tool to fuel growth and expand operations, but on the other hand, mismanagement can lead to financial distress and limit your company’s ability to thrive.
In this article we explore some effective strategies for managing business debt, offering actionable tips that can help business owners stabilize and improve their financial footing.
1. Leveraging Your Business Credit Score for Better Debt Terms
A part of managing business debt, is understanding, and improving your business credit score.
A strong credit score will continue to enhance your ability to secure financing under favourable terms and plays a pivotal role in negotiating better payment terms with suppliers.
This type of leverage can significantly alleviate cash flow pressures and allow your business to have more time to pay off its debts without incurring additional fees or a higher interest rate.
Read this short article on steps to improve your business credit score in Canada for advice on how to bolster your score and ensure you can leverage it to your business’s advantage.
2. Understanding Your Debt Structure
Before you can manage your debt, you need to understand it. You need to break down your business’s debt into categories such as short-term debt, long-term debt, secured, and unsecured debt.
This type of categorization will help you prioritize repayments and help manage your cash flow more efficiently.
Short-term debts usually carry higher interest rates and are due within a year, so addressing these first can reduce overall interest payments and free up cash.
Long-term debts typically have longer maturity dates and lower interest rates compared to short-term debts. It’s important to ensure that the repayment terms match your business’s growth projections and allows you to invest in growth opportunities without straining finances.
Secured debts are backed by assets as collateral, which may also result in lower interest rates but the risk of losing critical business assets if the loan is defaulted on can make them a bit risky. Secured debts must be prioritized to avoid potential asset seizure.
Unsecured debts do not have assets backing them but usually come with higher interest rates because of the risk to the lenders. Prioritizing these debts for repayment is also important because of significantly higher interest rates.
Creating a Debt Management Plan
You’ll also want to set up a solid debt management plan, especially if you’re looking to keep the business finances on track. A simple way to get this started is by assessing the total amount of business debt and compare it the business income and expenses.
You should also identify areas where costs can be reduced and put these savings towards paying off debt.
It’s a good idea to prioritize your debts by interest rate and by the size of the debt, depending on what strategy fits best with your business model and cash flow situation.
This could be an area where hiring an accountant or book keeper would probably come in handy and make the plan run more smoothly.
Negotiating with Creditors
If your business is struggling to meet debt obligations, proactive communication with creditors is key. Many creditors prefer to negotiate terms rather than deal with the consequences of default.
You might negotiate for lower interest rates, extended payment terms, or even debt forgiveness in some cases.
Be transparent about your financial situation and have a clear plan in place to show your creditors how you intend to return to profitability.
Refinance and Consolidate
If you find your business is falling behind with loan payments, there’s always opportunities to refinance and/or consolidate the debts and get better interest rates and simpler debt structures.
Refinancing or consolidating debts involves taking out a new lump-sum loan to pay off much or all existing debts, and hopefully at a lower interest rate. The benefits of this are a possible reduction in your overall monthly payments, an extension of the repayment period, and more manageable payment terms.
Leveraging Technology for Debt Management
In the era of the IoT (Internet of Things), leveraging technology for debt management is money well spend and frees up time for yourself and your accounting department.
There is financial software that tracks your debt repayments and cash flow in real-time. There’s technology that can offer insights into your financial health and help you make optimal decisions about where to allocate funds more efficiently.
Legal Considerations and Insolvency Options
It’s always a good idea to have a little background in your legal and insolvency options. If you understand the legal implications of not being able to meet your debt obligations, you can be better prepared for a formal proposal or a bankruptcy.
Making yourself familiar with these legal mechanisms will help you understand how to legally restructure your business’s debts, ensure continuity of operations, and protect your assets and future creditworthiness.
You can retain a financial advisor or a bankruptcy attorney to understand the implications and processes involved in these various options when it comes to managing a business’s debts.
Conclusion
Remember, maintaining a strong business credit score plays a major role in all these strategies and acts as a leverage point for better terms and more opportunities.
The strong advice and takeaway from this article is don’t overlook the importance of properly managing debt, as you work towards achieving financial stability and success.
