Risk is typically an inherent part of running a business, as bookkeeping is for maintaining accounts. You cannot plan for a decline, termination of a significant revenue-creating resource, natural disasters, or other harmful events. This is because you may succeed when you adopt a too-cautious entrepreneurial approach, and this makes taking risks a necessary part of any business. But sometimes, the odds will move against you.
Unsurprisingly, business loans can be a powerful strategy to raise funds to finance growth and expansion. Also, large corporations and government institutes use it all the time for the said purpose, and small businesses can do the same if they manage it diligently. While business loans can be helpful to a small company, too many loans or too large of an amount can be counterproductive. Getting into debt through these loans could be detrimental to a small company’s goals and longevity.
The US Small Business Administration (SBA) believes lack of money, personal use of company funds, and poor credit management to be some leading reasons why small businesses fail. Small companies that lack the finances to meet their necessary expenses, such as payroll and utility bills, can move into delinquency or bankruptcy.
To ensure your small company’s financial health, you must know the tactics available for systematically and effectively getting rid of meager as well as serious business debt. Cutting down excess expenses, restructuring loans through a third party, and adopting a proactive approach enable small business owners to manage what they owe.
Here are four strategies to help you lift your company out of serious debt.
Do your homework thoroughly before deciding on a loan
Analyze your debt coverage ratio and get a good handle on your present financial situation before applying for a loan. Hence, recheck your financial plan, rectify all suspected bookkeeping accounts, and adjust for unexpected changes in cash flow if you are falling behind on monthly payments. All this will determine your ability to pay it back. In fact, creditors use the debt coverage ratio as one of the yardsticks to determine the interest, amount, and terms of a loan.
To calculate the debt coverage ratio, divide your net operating income by total debt service, i.e., the principal payments of the debt as well as the interest amount. Most commercial banks typically consider a ratio of 1.15 or more to be optimal. Hence, a small company should look at ways to boost its cash flow if its ratio is 1 or lower.
Your efforts may be to persuade the lender to provide you with a substantial debt but play it safe. This is because there are good chances that you will be struggling to pay it back if your debt coverage ratio indicates that the debt you are looking for will be a stretch.
Boost cash flow to pay down the debt
As being surrounded by serious business debt is not a good thing, every small company’s top priority must be to pay off its debt. Here are smart ways to boost your cash flow to alleviate the business debt:
Increase company productivity
Building business efficiency or finding new ways to generate revenue can be good tactics for improving cash flow. Enhancing employee skills by introducing new tools and training can be an excellent investment in productivity and increasing profits. In this regard, new marketing initiatives can also reinforce the business’s bottom line. Though it will cost you in the short run, a well-developed marketing plan can ensure massive profits that, in turn, you can use to pay off the serious business debt.
Renegotiate debt terms with vendors
You do not have to be afraid of talking to your creditors. Remember, they aim to get paid. At the same time, they are less interested in chasing you around to get their money back. Hence, approach them and adequately show your current financial situation to them. Explain your financial hardships and offer them details demonstrating your earlier efforts to lower costs. Convince them that the more they reduce the debt or give a payment discount, the earlier they will be able to pay down the debt. Once they have given you a second chance, you must work hard to pay back the revised amount of debt. Periodically, go for new suppliers offering you better pricing. All these are great ways to enter favorable transactions in your bookkeeping records and boost the business cash flow.
Optimize investor turnover
Excess or stagnant inventory can drain small companies’ significant cash reserves. Hence, they should be closely monitoring the inventory and purchasing it ‘just in time’ for anticipated demand. Also, work with suppliers, whenever possible, who offer rights of return for unsold goods or consignment inventory.
Raise funds to pay off your debts
A new business, which is free from loans, is a far better investment proposition than one that has financial issues or serious business debt. Still, small companies have options:
Borrow from family or friends
Though it can be embarrassing and could strain your relationships with them, you may obtain favorable rates.
Liquidate assets
Lenders may accept it, as they all want to get paid at least something, which is a better deal for them than your bankruptcy. Their only alternative might be litigation, which is time-consuming and expensive.
Look for new investors
In your difficulties, investors might want higher returns than otherwise. Therefore, be aware that any new money you obtain will be expensive.
Consolidate your loans
Consolidating multiple loans is one of the fastest and most effective ways to lower interest rates and pay off the accrued serious business debt faster. Therefore, attempt to get a single low-interest loan.
Final Note
In the end, every decision, from bookkeeping to venture gain, which you make today, will impact both your personal as well as your company’s finances. Therefore, consider all of your monetary resources and explore your options thoroughly before committing to a particular solution.
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