For those who own small businesses, having a good work ethic, great product or service, hardworking employees and more is oftentimes not enough to prevent you from running your business into debt and other issues. The fact of the matter is that debt can sometimes be an unavoidable part of running a business. In fact, debt can sometimes be good for your business, but on the flip side of the coin it can also be detrimental. Such is the double-edged nature of debt.
The key in all of this is making good and informed decisions about what type of debt your business should incur, the terms of such debt and other such important matters that ensure that yours is a sensible or positive debt profile.
All the above points are things that can help your company avoid business bankruptcy and being blacklisted by various financial instructions if things don’t quite work out with your business and any debt that it has incurred.
Another important piece of information to convey about business debt is that, where possible, you should avoid personally guaranteeing a business debt at all costs. The reason for this is perhaps self-evident. Any business loan or debt that you personally guarantee means that if for whatever reason the business is not able to repay the debt, then you, as the personal guarantor, will become liable to repay the debt. This situation, for the most part, defeats the purpose of forming an LLC, or whatever business entity your business is formed under since there will no longer be that personal liability protection that such entity is meant to provide.
Having said that, here are five main ways to manage your small business debt:
1. Work with a reliable attorney
Perhaps one of the most important things you can do with regard to managing your business’s debt is to ensure that you work with a reliable business attorney, especially before signing any contracts with your creditors.
You should get this attorney to look over all the contract terms being proposed by the party you are considering taking the loan or credit from. A good small business attorney should be professional, affordable, experienced and with an established track record of representing the interests of small businesses like yours.
2. Consult a financial expert
Another important thing to do in managing your business’s debt is to ensure you consult a financial expert to help you determine the best solutions available for managing your business debt. While a financial expert might be an added expense your business would rather avoid, the benefits they bring to your business far outweigh whatever cost you would need to incur in securing their services.
Some of the value that a financial expert brings to the table include helping you keep track of your business finances, helping you shop around for the best deal in terms of the best, cheapest and most friendly credit terms, as well as possibly helping out with your accounting (if they are qualified to do so,) all of which can help you keep on top of managing your debt.
3. Pay the debts in instalments
Even if your business is not doing too well and is struggling to keep up with its financial commitments, you should always stay on top of matters rather than avoid them. To this end, it will be better to approach the creditor and explain the difficulty the business is facing in meeting its repayment terms, and if necessary, negotiate a reduced repayment rate or lower installments. Lower than normal repayment terms is a common practice that is used by creditor and debtors to find a middle ground and to help debtors manage their dent.
Whatever agreement you come to with your creditor, it is equally important that any new terms you agree on, and any consequent contract that you sign is looked over by a local business lawyer to ensure that you are protected and not being taken advantage of.
4. Use a financial plan
The importance of a coherent financial plan to manage not just your debts, but all facets of your business’s finances cannot be overestimated. Specifically, a financial plan is important since it helps you to keep track of the inflow and outflow of funds, as well as any necessary projections thereof. A good financial should not only be focused on the short-term situation of your business, but it should also focus on the long-term perspective as well. More so, you want to be as transparent as possible during the development of this plan, to ensure that you don’t miss out on any important debt repayment factors.
5. Cut costs
In addition to all the above-mentioned things, especially if it is still a challenge to settle your debts as at when due, even after the reduction in repayment rates, then you might also have to consider cutting down on some costs, especially the non-critical ones. While you may have to give up some privileges and unnecessary expenses in the business, the overall benefits of cost-cutting will be so much more beneficial. The added benefit is that this might only be a temporary situation until you are able to repay your loans. With that being said, avoid over-cutting on necessary costs, since this might compromise business operations and even the motivation levels of your employees at the company.
All things considered, there is usually not a lot of room for poor decision-making when it concerns the finances of your business. Such poor decisions are usually the fastest way to kill a business. The above points have been given in the hopes that they will give you tips on things you can potentially do if you are struggling with business debt.
In passing and as previously stated, debt is not a bad thing if it is properly structured and utilized. It can also take a small business to greater heights if used properly. On the flip side, it can also cripple and spell the end of a business if not managed properly. So any small business owner will do well to follow the above guide in helping to manage their small business debts.