5 Debt Management Tips for Small Business Owners
Whether you like it or not, you will have to take up debt at some point to keep your business afloat. A line of credit, business loan or a credit card can help purchase equipment, finance growth or even pay employees. Notwithstanding, debt can also be dangerous if not well managed. It can negatively affect cash flow and put the business in the red financially.
According to a study conducted by Experian in 2016, the average small business in the U.S. has a debt of $195000. Before you get your business into spiraling debt, here are some tips on how to manage debt.
- Negotiate Interest Rates
One mistake many business owners make is to assume that you need your bank more than they need you. Just like you, the bank is in business and is clamoring to do business with you. For this reason, you need to get your lenders competing to give you loans. A good way to approach this would be to call your bankers and let them know you’re interviewing banks for a loan facility for your business and you’d like to find out whether they’d be a good fit for you. This gets you out of the applicant zone and sets you up as a hot prospect. The onus is now on them to convince you they are the best provider.
- Prioritize Your Debts
If you’re trying to get out of debt, always start off with the debt with the highest interest rate. However, if you have a debt that you’ve personally guaranteed and run the risk of creditors coming after your personal possessions, then you should sort it out first. This is how to manage debt in your business.
- Remove Personal Guarantees
Personal guarantees put you in a vulnerable position when your business encounters financial challenges. For this reason, you should work to remove all personal guarantees or at the very least limit their scope. Remember to keep your spouse off any loan guarantees.
- Negotiate Better Amortization Schedules
If your business is struggling with cash flow, then it is better to spread out your loans for as long as possible. The monthly payments will be lower and will give your business the much-needed reprieve. The total cost of the loan will go up but you will be able to guard your cash flow.
- Make Payment Terms Shorter
Do you have clients on long-term payment plans? Or perhaps you have some that have a habit of paying late. This can negatively affect cash flow in your business. You can try to incentivize your clients to pay earlier than they normally would by giving them discounts or charging penalties for late payment. All new clients should be put on a shorter payment plan. For example, if your clients have a 90-day plan, you should give all new clients a 30-day plan. You can also ease cash flow by signing up with a factoring receivables provider. This way, you get cash on any approved invoice is as little as 2 days.