Whether launching a startup business or having a long-established company, debt can be helpful. By taking on debt, your business can access additional funds for expansion, acquiring equipment, hiring more employees, or developing new products and services. Additionally, business debt allows you to take advantage of opportunities that may arise when you need more cash.
However, it would help if you managed your debt responsibly to avoid financial difficulties and negative consequences. In this Huddle Business Capital blog article, you will learn about business debt and how to manage it effectively.
What is business debt?
Before we discuss debt management strategies, we want to explain business debt. Simply put, it refers to any financial obligation or liability a business owes to another party. This can include small business loans, funding to finance equipment, business lines of credit, or any other form of borrowed capital.
Unlike personal debt, business debt is specifically tied to the company's financial structure and is often seen as a strategic move rather than a burden. Following is a list of common debts that most businesses have.
- Business loans (short-term, long-term)
- Business credit cards (accrued interest and monthly payments)
- Equipment lease contracts
- Employee wages and benefits
- Rent, utilities, and insurance
- Business taxes
Assess your current debt situation.
The first step in managing business debt is to create a comprehensive debt inventory, listing every loan, credit card balance, and outstanding payment your company owes. While potentially daunting, this process is the foundation for effective debt management.
Next, perform a thorough financial statement analysis. Examine your business's income sources, monthly expenses, and spending patterns. This will give you a clear picture of your company's financial health and help identify areas where you can cut costs or redirect funds toward debt repayment.
Calculate your debt-to-income (DTI) ratio.
Your company's debt-to-income (DTI) ratio is a key indicator of its financial stability. The DTI formula is simple: it is the sum of your company's monthly debt payments divided by your gross monthly income.
Let us use an independent trucking company as an example. The company has $1,900 in monthly debts and a gross monthly income of $7,000. In this scenario, the trucking company has a DTI ratio of 27% ($1,900 divided by $7,000). It is worth noting that a DTI that doesn't exceed 35% indicates a healthier financial position and a better ability to manage debt.
Reduce business spending.
If your company has many business expenses, allocating funds to pay off existing debt might be challenging. So, think of ways to reduce your business spending without compromising quality or affecting your company's productivity. Start by looking at the complete list of recurring expenses (e.g., office rent, employee payroll, utilities) and non-recurring expenses (e.g., equipment purchase, one-time legal fee, business vehicle purchase).
If you can pinpoint any expenses that could be cut or removed entirely, please make a note of them. These might include monthly subscriptions, fees for underutilized software, or nonessential items like office perks, gifts, and lavish lunches.
Review your business loan terms.
If you have obtained a small business loan, it's essential to carefully review the interest rate and terms to ensure that they are still favorable and aligned with your business goals and budget.
Business loan refinancing offers the opportunity to secure better terms, lower monthly payments, and free up cash flow. Debt consolidation loans can simplify your financial obligations by combining one or more debts into a single, more manageable payment.
Boost your revenue streams.
Meeting or exceeding your monthly, quarterly, and annual sales goals will allow you to reinvest in your business and allocate more funds toward debt reduction. While there is no one-size-fits-all approach to guarantee increased sales revenue, specific strategies can be helpful. These include optimizing your pricing structure to maximize profits without alienating customers.
Next, effective upselling techniques can significantly impact your business by motivating customers to purchase higher-value products or services. Lastly, consider implementing a customer retention program, as loyal customers are more likely to make repeat purchases and recommend your business to others. Remember, every additional dollar earned is an opportunity to chip away at your debt faster.
Seek professional assistance.
When facing financial difficulties such as overwhelming debt, it's crucial to recognize when professional assistance is necessary. Business financial advisors can provide strategies to revitalize operations, improve profitability, and reduce debt. Additionally, credit repair services can assist in improving your business credit score and financial standing.
Don't hesitate to contact these experts; their knowledge and experience can be the key to overcoming financial challenges and securing a stable future. Remember, seeking assistance is a sign of strength, not weakness, and can be the first step towards financial recovery.
Disclaimer.
This Huddle Business Capital blog article is purely educational and contains general information and opinions; it is not intended to provide advice or recommendations of any kind.
