There comes a time for many SMEs where external funding becomes a necessity for maintaining growth and ensuring success. Whilst debt can be a fantastic tool to acquire the working capital your business needs to grow and expand, it has to be managed carefully.
One of the biggest mistakes SMEs make is taking on too much debt too quickly before they have the cashflow necessary to support their growing operations whilst also servicing the borrowed debt.
If you want to position your SME for success here at six tips to manage your business debt more effectively.
1. Organise your creditors
Make a list of your debt-related expenses and obligations. This could be on a daily, weekly or monthly calendar. Include both fixed and variable expenses so you can adjust your expectations when rates or fees change. Note the interest rates and charges attached to each repayment to understand where your money is going and when. Having your debts mapped out will help you to not only stay on top of repayments but also gives you a planning tool should you wish to take on more debt in the future.
2. Prioritise your repayments
Work on a strategy to optimise your cashflow. There are a couple of ways of doing this. Many businesses choose to pay down the smallest debts first to eliminate debt fast by reducing the number of creditors you owe, which is easy to stick to and provides regular satisfaction as you quickly hit your goals.
For other businesses, they may choose to pay the highest interest rate loan first. In terms of minimising your total expenses, this is the optimal way as loans with higher interest rates will obviously cost more to repay so by eliminating them first you’ll save money on interest.
3. Negotiate
Don’t be afraid to negotiate payment terms with your creditors. Ask for longer payment terms to maximise your current cashflow. Obviously, this needs to be balanced with interest charges because the longer you take to pay out the loan the more interest you will pay. Short-term cashflow and liquidity is a business killer so if you find yourself in this position negotiating lower repayments is a good strategy for retaining more cash week to week.
4. Consolidate your debts
Too many debts can be hard to manage even if you have a solid plan. Debt consolidation sees a lender take all of your debts such as credit cards and business loans and roll them all together into a single facility with one monthly repayment. The main advantage is a lower interest rate and an easier-to-manage debt.
5. Manage debt exposure
Consider smarter ways to fund your business that don’t rely on unsecured debt. Invoice financing is a great option for B2B owners as it allows them to use current outstanding invoices as security, turning those unpaid invoices into cash within a day. Instead of waiting 90 days for payment by your customers for your goods or services you have already delivered, you can secure that funding immediately to help your business grow.
6. Play the long game
I always encourage businesses to look ahead. Even though things might be good right now it doesn’t mean your financial situation can’t suddenly change. Avoid taking on too much debt just because you can. When times are good, set aside an emergency account with savings for a rainy day. Also, make sure you invest in building your brand. Intangible assets such as brand awareness and customer loyalty may prove to be a more valuable long-term asset than new equipment or a new office paid for on credit.
