Almost half of all small business startups fail within the first five years due to poor capital arrangements or too much debt. Any business owner will attest to the fact that managing your debt well is key to preventing failure in your business start-up and maximizing its potential. After all, the average small business has around $195,000 of debt, according to a study by Experian. With 43 percent of small businesses applying for additional funding in the last year and the small business credit card segment being worth $500 billion, it is more important than ever that small business owners and managers equip themselves with the skills to not only manage their debt but to rebound should they find themselves in a precarious and debt-laden financial situation.
Go Back To Your Cost Drawing Board
As a small business, you may not be able to access certain economies of scale that larger businesses enjoy. As a result, maintaining strict cost control policies is important if small businesses want to survive. While debt can act as a useful enabler during difficult financial times, it does need to be repaid at a cost and there are specific reasons why a business would need cash. Most small business owners opt to put their own cash into the business to keep it going or repay debt.
However, if you have exhausted that option and your monthly sales forecast does not look promising enough to make the debt repayments, its time to look at cutting your business costs such as your staff, production and business premises rental costs. If you have rented out or bought a business location, you can try to negotiate lower rates with your landlord or sublet a portion to gain income. Alternatively, you can consider moving your business offices to your home and forgoing the business rent expense altogether. Another option for cutting business costs is reselling unused assets such as business vehicles or equipment and auditing your production process to identify areas of excess wastage (materials, time and idle labor).
Formulate A Plan- Starting With Your Approach
To tackle your debt situation, you must be armed with a well researched and suitable strategy including a well-planned business budget. However, 61 percent of small businesses did not create a budget in 2018. A good budget is one of the best tools and hope for rebounding after being in-arrears or bankruptcy, whether it is business and personal debt. As a business owner and the person responsible for the debt, you must first approach your debt situation with a positive and determined attitude. Debt is an acceptable part of doing business but not a necessity. Having success with it lies in the way it is handled and knowing the limits of your business. A strong resolve to getting your debt under control, learning from this and moving forward will determine whether your business will be able to dig itself out of debt and stay that way.
Part of your debt repayment plan should be assessing all of your debt, their repayment deadline and accompanying interest rates. Using this approach you can decide on the best repayment strategy (either using interest rates or repayment terms). This is also crucial in helping you find out how your business got into this debt position in the first place, and unwise business moves that should not be repeated in the future. For example, you may need to shed unnecessary employee costs which would involve either terminating staff or moving them to a part-time/freelance contract. This may also mean that you and other employees will take on more roles, requiring improving in your time management skills.
Reconsider Your Business Credit Cards And Their Appropriateness
Business credit cards carry lower interest rates but still have average rates of around 19.23 percent, according to the latest interest rate data from the Balance. Over half of small business owners currently have a business credit card and plenty more of them use their personal credit cards for business use. Credit cards are notorious for being one of the highest costing forms of debt. One good way to get your debt under control is to eliminate or reduce those credit card costs as more of your repayments are spent on interest charges than repaying the actual principal amount borrowed.
Check around for business credit card offers with zero percent balance transfer offers. These can give the business a break from additional charges for a period. Alternatively, you can think of contacting your creditors and working out an agreement with them to avoid bankruptcy. If you have been a long-standing and faithful customer, they may be tempted to lower your rate or restructure your repayment agreement.
You may not be able to completely eradicate debt from your business, but that is not the point. A certain amount of debt is both healthy and necessary. The key to employing debt in your small business is maximizing its benefits and minimizing the costs of it to your business. Keeping track of and keeping it to manageable amounts makes it easier to avoid it piling up again and allow you to strike the perfect balance.
