Stay Ahead of Your Business Game by Stay in Control of Your Business Debt

Lack of strategic planning, poor financial management, lack of money and personal use of business funds are some of the top reasons  why small companies fail. Businesses that lack money to cover basic operating costs such as payroll and rent can swiftly spiral into delinquency or, worse, bankruptcy.

To ensure the financial health and long-term sustainability of your business, it’s of utmost importance to know the various methods of paying down and manage your business debts efficiently and consistently, being proactive in formulating a repayment plan allows you to reclaim control of your business and start growing it to where you envision it to be.

If you struggle with small business debt, we’re going to guide you step-by-step through what you need to do to eliminate the debt and get your business back in good financial standing.

But First, What Is Business Debt?

Business debt, also known as non-consumer debt is money owed by a business to a third party. Debt is very necessary for every business journey. By seeking financing, you’re providing fuel to your company that it needs to grow.

Similar to personal debt, business debt is typically divided into two categories: the Good and the Bad. Good debt is a sensible investment that supports your business growth and ability to create wealth; on the other hand, bad business debt tends to be expensive (high-interest rates) and may cause you to fall into a vicious debt cycle where the debt becomes untenable and your business cannot afford to pay back to your creditors on time and in full.

To reduce the likelihood of your business debt becoming bad debt and maintaining your company’s financial health, take heed of the following strategies:

1. Assess Your Business Budget

Before you begin to attack your business debt, get a good understanding of your business current financial situation by conducting a comprehensive financial assessment. Looking at the staggering debt numbers can be very daunting and overwhelming, but you need to be clear about it in order to tackle the debt efficiently.

Once you get a good handle of your situation, you can proceed to evaluate your business current cash flow, and forecasting future cash flow. If you find your business is falling behind on monthly payments, re-analyse your cash flow and re-adjust it accordingly.

Next, it’s time to formulate a new business budget. It helps to identify your revenue sources, fixed and variable expenses. You don’t have to make a significant overhaul on the budget if it doesn’t call for it, you just have to dedicate a specific budgetary line to debt repayments. Seek professional help from your bookkeeper or accountant if you need to.

2. Decrease Your Business Expenses

Once you have your business budget in place, move on to evaluating your operating costs. Work out which expenses that are not serving your business can be cut out. Ask yourself are you spending more than you should on marketing channels that yield little return? Is it possible to renegotiate some of your suppliers’ contracts?

One thing to take note of is that you might feel like you need to cut costs down to the bone, but sometimes it can be counter-productive. For example, saving rent by decreasing shop floor space would reduce the variety of products you can display to customers. Laying off some of your employees, and you won’t be able to handle any larger contracts that come your way.

The key takeaway here is to cut when you need to, but do it sensibly. Trim the fat out of your business, not the muscle. Use your financial statements in pinpointing expenses contributing to your debt.

3. Renegotiate The Terms of Your Loans with Lenders

If you’ve fallen behind your payments, consider picking up the phone to call your lenders and have a direct negotiation with them. They may not accommodate you, but it can be worth trying. You don’t know until you look into your options.

A lot of lenders are willing to work with you to restructure your repayment schedule that will ease your burden, the last thing lenders want to do is send a collection agency after you as it’s a huge loss for them as well. Aside from that, speaking with your lenders directly can enable you to explore possibilities such as lower interest rates, debt consolidation, and more. Just be aware that renegotiating the terms of a loan is likely to impact your credit score, so it’s best to use this strategy as a last resort.

4. Increase Your Business Profitability

Look for opportunities to generate additional revenue for your business. There are several methods you can put to work immediately, such as:

  • Diversify
    Add additional products or services to your current offering, or diversify your marketing approach to target new customer base.
  • Upsell
    Sell more to your existing customers by offering incentives, promotions or bundle your current offerings in a way that would entice customers to buy more from you.
  • Increase Prices
    Before raising your products or services’ prices, make sure you communicate this to your existing customer and do so reasonably.
  • Optimize Inventory
    Clear your leftover inventory by looking for suppliers that will offer rights of return for unsold goods.

5. Restructure Your Debt

If your business has accrued multiple debts, it’s advisable to restructure your debts into one manageable debt, making it easier to track, manage, and repay. Most often, business debt consolidation works like personal debt consolidation. There are two methods to restructure your debt: Debt Refinancing and Debt Consolidation.

To refinance your debt, you are switching out existing short-term debt with a lower-rate business loan. Once you secure the new loan with a lower interest rate, you use the proceeds to pay off your existing high-interest debt. Meanwhile, if you choose the business debt consolidation method, you’re merging multiple loans together into one new loan. When you receive your new loan funds, you’ll pay off your existing debt with that money. Then you’ll make one monthly payment to your new loan.

Restructuring your business debt will not only reduce your commitments greatly but also encourages more interest savings and improve your credit score as well.

Want to know if you’re financially eligible for a business loan? Talk to our advisor to find out more.

Avex Credit is a licensed money lender in Malaysia under the purview of the Ministry of Housing and Local Government and governed through Money Lenders Act 1951 and Money Lenders Act (Amended) 2003. We provide a variety of personal, mortgage and business loans that are tailored to meet your specific needs.