4 Strategies that help lift small companies out of serious business debts

Risk manager stop domino effect of business going into serious debt

Risk is typically an inherent part of running a business, just as bookkeeping is for maintaining accounts. You cannot easily plan for recession, termination of a significant revenue-generating facility, natural disasters or other unfavorable events. This is simply because you may hardly succeed when you adopt a too-cautious entrepreneurial approach, and this makes taking risks an imperative part of any business. However, sometimes the odds will move against you.

Unsurprisingly, business loans can be a powerful strategy to raise funds to finance growth and expansion. In addition, to large corporations and government institutes who use it all the time for the said purpose, small businesses can also do the same when they manage it diligently.  However, there is also a thing known as “too much business loan” and it is certainly not OKAY for a small company. It opposes you in your objective of accomplishing your mission and long-term financial goals. Serious business debt is something that consumes and spits out many companies, so if your company is in a similar situation, know that you are not alone.

In fact, the US Small Business Administration (SBA) believes lack of money, personal use of company funds, and poor credit management to be some of the leading reasons why small businesses fail. Small companies that lack finances to meet their basic expenses, such as payroll and utility bills, can quickly move into delinquency or something even worse… bankruptcy.

To ensure your small company’s overall financial health, you must know the various tactics available for systematically and effectively getting rid of meager as well as serious business debt. From cutting down excess expenses to restructuring loans through a third party, adopting a proactive approach and formulating a payback plan enables small business owners to manage what they owe before it becomes unmanageable. Here are four smart tactics to take control of your debts:

Check out America's Best Bookkeepers 1. Do your homework thoroughly before deciding on a loan

It is imperative to analyze your debt coverage ratio and get a good handle of 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 of this will determine your ability to pay it back. In fact, creditors use debt coverage ratio as one of the yardsticks to determine the interest, amount, and terms of a loan.

To calculate 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 a large 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.

2. 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 their debt. Here are smart ways to boost your cash flow to alleviate the business debt:

a)   Increase company productivity

Building business efficiency or finding innovative ways to generate revenue can be good tactics for improving cash flow. Enhancing employee skills by introducing new technologies and training can be exceptional investments in productivity and escalating profits. In this regard, new marketing initiatives can also reinforce the business 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.

b) Renegotiate debt terms with vendors

You do not have to be afraid of talking to your creditors. Remember, eventually they aim to simply get paid. At the same time, they are less interested in chasing you around to get their money back. Hence, approach them and fully disclose your current financial situation to them before it is too late. Explain your financial hardships and provide them with details demonstrating your earlier efforts to lower costs. Convince them that the more they reduce the debt or provide an early payment discount, the earlier you 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. Finally, periodically, go for new suppliers offering you better pricing. All of these are great ways to enter favorable transactions in your bookkeeping records and boost the business cash flow.

c)   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.

3. Raise funds to Pay off your Debts

A new business, which is free from loans, is a far better investment proposition than one which has financial issues or a serious business debt. Still, small companies have options:

a)   Borrow from family or friends

Though it can be embarrassing and could strain your relationships with them, you may obtain favorable rates.

b) 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.

c)   Look for new investors

In your difficulties, investors might want higher returns than otherwise. Therefore, be aware that any new money you obtain would be expensive.

4. Consolidate your Loans

Consolidating your multiple loans is one of the fastest and most effective way to lower the interest rates and pay off the accumulated serious business debt faster. Therefore, attempt to get a single low-interest loan.

Final Note

In the end, every decision, from bookkeeping to venture acquisition, 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 fully before committing to a particular solution.

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