Finance

Business Debt – Reasons and Ways to Deal with It

All businesses run on credit. It is true to a large extent. Businesses need working capital on a daily basis. They have to pay for the utilities on time. Employees need to receive their salaries on time. Hence, the business enterprises need to maintain adequate liquidity at all times. They cannot rely on the realization of their receivables to meet these recurring expenses. The understanding can take time. Therefore, business entities need to have ready access to credit. It should not be a problem as long as the debt is manageable.

Handling debt is an art. If you do it the right way, it is easy. However, the situation can become challenging if you do not approach the issue correctly. Let us discuss some easy ways to manage your business debts.

Plan your repayments – Do your research

You must do your research well when you Apply for a Business Loan. Understand the terms and conditions of the sanction. Every business activity has a breakeven period. Ensure that your moratorium extends beyond the breakeven period. You should have an idea about the debt service coverage ratio. It will help you manage your debt better. Be aware of the rate of interest and the loan tenure. It enables you to make a strategic plan for the repayment of the loan.

Increase your cash flow

Increasing your monthly cash flows ensures that you have a higher disposable income on hand to cater to your loan instalments on time. There can be other charges such as accrued interest, penal interest on delayed payment, and so on. Hence, increasing your cash flow is a sure way of dealing with these expenses.

How do you improve your cash flow? The easiest method is to increase your production. Adopting a better debt realization strategy can also increase the cash flow. You can negotiate better credit terms with your vendors and clients. Managing your inventory turnover well can also result in a good cash flow position.

Negotiate with the lender for lower interest rate

Not many people know that a good credit score can help you negotiate with your bankers for a reduction in the interest rate. Try giving collateral. Banks provide better rates to borrowers who provide adequate collateral. A reduction of even 1% in the interest rate can work wonders.

If you use business Credit Cards, search for better card deals. You can transfer the balance to such 0% APR cards and thus save on paying the higher interest rates. Businesses with a higher volume of debt can try out debt consolidation loans. It is an excellent way of managing your business debt. It is better to approach banks that offer these facilities and check out your Business Loan eligibility.

Concentrate on your fast-moving products

There are fast-moving and slow-moving products in every business. Similarly, some products give you higher income as compared to the others. Concentrate on such products whereby you increase your cash flow position. It automatically improves your debt service coverage ratio (DSCR). The thumb rule is that your DSCR should be 1.5 and above to be able to repay your debts on time successfully.

Cut out unnecessary costs

Revisit your budget and identify the necessary costs from the unnecessary ones. It is better to eliminate the unnecessary expenses thereby increasing the flow of cash into the business. Spending extravagantly on marketing is not necessary when you have a lot of debt to repay. You can channelize your funds in a better way.

Prioritize your debts

Make a list of all your debts and classify them according to the degree of priority. The utility bills such as water and power bills are priority debts. If you default on one payment, they discontinue the supply of water or power. It can lead to a panic situation. Similarly, your mortgage debts are essential. The lender might move to possess your mortgage property and cause you a lot of embarrassment. Pay your taxes on time, or else you risk prosecution. The unsecured loans or borrowings from friends and family and others have a lower priority as compared to the other secured debts. Pay the priority debts first before making arrangements to pay the non-priority ones.

Business debt is inevitable. It is important how you deal with it. Having a clear strategy for repayment can help in managing the obligations better. Follow the tips discussed above to ensure that you do not have creditors breathing down your neck at all times.

Also Read: 5 Critical Factors That Impact Your Loan Approval

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