Here are 7 quick tips to help you get your debt management procedures in place:
1. Keep a prioritised list of your creditors
When trying to manage debt, you can (very easily) get lost in tracking what you owe. When you lose track of what you owe, it’s all too easy to miss repayments. One way to stay across your debts is to keep a prioritized spreadsheet of your creditors, perhaps in order of dates that you owe them money or the size of the debts.
Once you’ve got a clear view of what you owe to whom, you can decide on the most cost-effective strategy for paying off your debts. For instance, you may want to focus on the smallest debts first, or perhaps you want to tackle the debts with the highest interest rates upfront and work your way down the list.
2. Look for the lowest rate, rather than convenience
There are a wide variety of lending products available for your business. Settling for a business credit card may be convenient, but it’s not always the most cost-effective way of reaching your business goals. Shop around for the lowest interest rate and you’ll be surprised at how many products there really are, and what you can save if you choose the right lending product.
3. Consolidate debt
Debt consolidation is a practice where the lender takes out all your debts (such as a business credit card, a line of credit, an unsecured loan etc.), and groups them into a single, low-interest loan that allows you to manage your debt through a single monthly payment. This is a controversial method of managing your debt, so here are a few quick positives and negatives:
- Lower interest rate - generally when you consolidate your debt you are able to get a lower interest rate that you would be paying if you left your debts as they are.
- One vs. many payments - the whole purpose of debt consolidation is to consolidate your debt into a single payment so that it’s easier to manage. This reduces the time spent prioritizing debts or keeping track of a large number of debtors.
- Smaller monthly outflow - due to a lower interest rate and only one payment compared to many, your overall cash outflow for the month will be smaller than before your debt consolidation.
- Easier to fall back into debt - now that all your debts have been bundled into a single payment, it is much easier to fall into the mindset that you can spend more and use the business credit card, thereby incurring further debt.
- Longer term of the loan - as the lender bundles all of your loans into a single loan with a lower interest rate, they may increase the length of the loan to be able to offer these features.
- You may end up paying more - if you extend the repayment term, you will pay more than you would have done originally, and this is where debt consolidation benefits the lender.
4. Create a strong business budget
Keep track of your expenses via a tight budget. By creating a budget that maps out your forecasted expenses (with allowances for unexpected shocks), you will be able to show where your money is and where it will be in the future.
5. Focus on brand-building
There are some marketing, brand-building and profile-raising activities that take time and can be difficult to measure from a ‘return on investment’ point-of-view. However, this ambiguity shouldn’t be confused with a lack of value. Finding new ways to retain customers and attract new ones can secure your revenue in the longer term. Branching into social media marketing, spending some time refreshing the company website, activating an Instagram account or even doing a letterbox drop in the neighbourhood, all help to ensure that your business is front-of-mind when the customer is searching for services that you provide.
6. Think long-term
Setting up an emergency business account might sound like overkill when business is good, but trust us, this is the perfect time to start planning for unexpected shocks. By putting aside a portion of your business profits each month for the sole purpose of being a reserve, you’re insuring yourself against the inevitable ups and downs of being in business. Of course it’s not a complete strategy, but having a pool of money to draw from during the off-season will certainly take the pressure off.
7. Manage your debt to equity ratio
Your business’ debt to equity ratio can be calculated very simply. Calculate all of your debt (total liabilities) and divide it by all of your own cash that has been used to fund the business (equity). This will come in handy when you want to apply for a loan, as many lenders will ask for this number.
Business debt doesn’t have to be stressful. With these 7 tips in your small business toolbox, you can start making headway on your debts and get cracking with future planning for 2018 and beyond.
Jacob leads the Working Capital team at Valiant. He is the go to guru for assisting small business owners with their everyday business finance needs.