Business debt is a familiar concept for most business owners. Many businesses can’t grow or diversify without embracing debt, and many businesses operate with an overdraft due to seasonal or irregular cash flow. If managed correctly, business debt is just a stepping stone to building a stronger enterprise. However, if poorly managed, debt can quickly put businesses and proprietors under immense pressure. 

The strategies below are provided to help business owners manage their existing debt and strengthen the financial health of their businesses.

Understand Your Debt

If you don’t already understand the debt facilities that your business already has, take some time to work through the following list. It is important for you to have a solid understanding of what your business owes – and what is owed to your business – whether that be credit cards, business loans, equipment finance, vendor financing or lines of credit.

For each debt facility, list the following:

• Outstanding balance
• Interest rate
• Monthly repayment obligations
• Term of the loan
• Fees and charges
• Collateral requirements (guarantees, security, etc.)

As confronting as this might be, it is important information to have at hand, as it will enable you to then prioritise your debt obligations and identify opportunities to reduce costs. 

Understanding your interest rate is essential – if your finance papers don’t clearly state the interest rate, then enquire with your lender. Often, for equipment finance, the term of the loan and repayments are stated; however, the interest rate is not so clearly presented. Also, be sure to understand how shorter and longer loan terms impact the amount of interest paid over the life of the loan. Can you afford higher monthly repayments over a shorter term to reduce interest costs? For collateral, do you know what assets you have committed as collateral? Is it still appropriate for these assets to be used; does the bank still require the guarantee or security, or can another asset be used instead?

Prioritise Expensive Debt

Different types of debt attract different interest rates, depending on how risky the bank deems that debt to be. Debt that is unsecured will attract a higher interest rate (credit card, overdraft facilities, line of credit) and typically, debt used to purchase old second-hand equipment will have a high interest rate.

Ideally, pay down the high-interest debt first, as this is the most expensive debt. However, be aware that some loans attract fees if paid down early, so first ensure that you understand the terms of your debt facilities. If comparing personal debt and business debt, be sure to understand the concept of after-tax interest rates, as interest paid on business debt is typically tax-deductible (although there are some exceptions).

Negotiate Terms 

Approach your bank and negotiate terms for your debt facilities. Although the process can be arduous at times, the benefits can be worth the effort. Likewise, if you are finding it difficult to meet repayments, approach your lender and ask them if there are ways to:

• Reduce your interest rate.
• Extend your repayment term.
• Switch to interest only if you are going through a period of change in your business (or temporarily reduce payments).
• Consolidate loans to reduce fees. 

Banks will likely require financial statements and cash flow forecasts for this process. Although preparing a cash flow forecast can be stressful, this is a powerful tool to have as a business owner. To reduce the stress and create a dynamic forecast, ask your accountant to assist with this task. 

Prepare a Cash Flow Forecast

The process that a business owner goes through to prepare a cash flow forecast can often be enlightening – it requires thought regarding cash flow management, income growth, income diversification, key business drivers and that dreaded question around “What do I actually spend my money on?” As confronting as this might be for some, it can create great goals and actions going forward to better manage business cash flow. So don’t view the cash flow forecast that the bank requires as another tick the box exercise, embrace it and use it in your business going forward.

Improve Cash Flow Management

Healthy cash flow is a key factor in effective debt management. Even profitable businesses can struggle with debt if cash flow is tight. Some tips to strengthen cash flow include:

• Speed up receivables by offering early-payment discounts or digital billing.
• Delay nonessential expenses without harming operations.
• Improve inventory management to reduce money tied up in unsold products.
• Review subscriptions and services to eliminate wasteful spending.
• Discuss terms with suppliers to try to reduce costs.
• Review sales/service opportunities and ways to increase income.

Small improvements in cash flow can make a significant difference in consistently meeting debt obligations.

Strengthen Income

As noted above, strengthening income is a key factor in improving cash flow and being able to meet debt repayments. Some ways to improve cash flow include:

• Reviewing your pricing strategy. This might seem simple, but many business owners don’t do this regularly enough.
• Introducing complementary services or products.
• Teaching staff how to upsell or cross-sell with confidence.
• Considering new platforms to sell your services and products from.
• Reviewing your loyalty program – is it too generous?
• Introducing KPIs that will incentivise staff to upsell or meet targets.

Managing business debt requires knowledge, clarity, discipline and strategic thinking. Good business owners will dedicate the time and effort required to this aspect of their business. If you need help understanding your business debt, preparing cash flow forecasts, improving business cash flow or creating a strategy for your business going forward, please contact us at Smith Thornton.