When bad debt happens to good business

Debt, a word that can strike fear into the soul of any business owner. If not managed effectively it could spiral out of control affecting not only your livelihood but those under your employ.

Contrary to initial feelings debt is not always a taboo phrase in business, as we have all learnt in our adult life, to get credit, you need to show that you can manage it. The only way that this is done is by having a healthy and manageable amount of debt.

For business, there are several instances where debt is a good thing for your business.

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Upping inventory or product/service delivery:

In order to generate more revenue, you may need to go out on a limb and purchase more to meet demand. Initially, there may not be enough funds to purchase the required inventory but the demand would need to satiate the need. Also, take into account any additional costs incurred as bi-product of adding to inventory. For example, you may purchase more product which may require additional storage space, which will incur storage rental costs.

Marketing needs:

Let’s face it, marketing is a vital part to the success of every business. Whichever you have identified as the most effective medium for your business, it will probably require a sizeable cash injection to garner real results. The desired outcome is to settle the loan off the back of the revenue generated by your marketing efforts.

Credit score:

As mentioned in order to get a good credit rating, you will need to prove that you are capable of meeting all the repayment requirements. This means that you will need a track record of past debt that shows just this. It need not be a large amount, but timeous and consistent payments increase your business credit rating.

Increasing your staff complement:

Hiring new staff could be beneficial for a business if the employee in question will positively affect business growth. This could be due to the fact that they are freeing you up to focus on business growth and development, or have a skill set that will translate to increased revenue. Ensure that all factors are considered, pertaining to the hire of a new employee or employees when deciding upon the loan amount.

These are the ideal circumstances in which to seek additional finance, but often times debt management is not as cut and dry. It can happen rapidly that a business loses control of the debt that it has accumulated. Below are a few points of consideration when dealing with overwhelming debt.

Return on Investment:

Every effort within the business, whether the influence is direct or indirect, always needs to link back to revenue generation. Are all employees and staff operating at maximum efficiency? This may not have an immediate impact on debt reform but will certainly benefit profitability in the long run.

Revisit your budget:

Are funds being managed in the best possible way for your business? As the business changes, so do its financial needs. The budget always needs to be the core of each monetary decision. Any unnecessary expenditure can be cut and put towards settling debt. Delay any big spend that will not be vital at that point in your business cycle.

Stack or snowball?

When it comes to debt management these are the two strategies to consider:

  • Stack: Identify the loan, credit card or line of credit with the highest Annual Percentage Rate (APR) and consistently make the maximum monthly payments you can afford. Other debt will receive minimum payments. Once your highest APR debt is settled, proceed to the next and so on. This method saves on interest paid in the long run.

  • Snowball: This means paying off the debt with the lowest monthly repayments. This does not save on interest but does provide the satisfaction of settling debt and encouragement to continue.

Consolidate or debt restructure:

Debt restructuring is a process by which you negotiate new terms with your current creditors. The idea is to work with your creditors and create a budget where you can consistently pay them a fixed fee over time, which allows you to stay in business.

Credit scores will be affected by both the above options, but remember the objective is to stay afloat before seeking a great credit score.

Alternatively, there are also various loans on offer for your specific needs. Each solution can be customised to fit your budget and repayment needs.

Owning a small business, one never hopes to get into this situation but there are a few options available should debt management take a turn for the worse.