Effective Strategies for Business Debt Management

Overview

Running and growing a business entails certain financial risks which are unavoidable sometimes. Whether you are looking to purchase new assets, acquire businesses, raising funds for future projects or expanding business reach, or dealing with cash inflow issues, effective business debt management could make all the difference between mere survival and profitable growth. 

Although businesses need to maintain a healthy debt equity ratio, substantial borrowings could mean high interest expenses, diminishing profits, limited reinvestment opportunities, etc. all of which could potentially comprise the financial health and long-term sustainability of the business.  

Understanding Business Debt- Meaning and Purpose

Business debt could be understood as the financial commitments made by a business to fund its operations, expanding or investing in newer business opportunities. It is the sum of money borrowed from lenders with the objective to repay it over a certain period. 

There are several sorts of commercial debt each having a distinct function with varying terms. Hence it becomes all the more crucial for companies to handle their business debt management seriously. Few types of business debt are-

Short term Loans- 

Short term loans imply debt obligations which are to be repaid within a period of one year or less. They fulfill immediate fund requirements such as raw material purchase, payment of staff salaries, etc. for smooth functioning of the business. 

Long Term Loans- 

Long Term Loans entail borrowing large sums for longer tenure to fulfil capital expenses i.e. setting up new business units, purchase of immoveable assets, acquisition of machineries, etc. They usually carry lesser interest over a longer duration. 

Lines of Credit- 

Lines of Credit are a revolving financing option that allows businesses to borrow up to a pre-determined amount as needed. They serve as an excellent choice for handling unanticipated expenses or managing business cash flows. 

Vendor Financing- 

Vendor financing enables businesses to purchase goods or services on credit with the supplier to be repaid over a predetermined period. While it could aid in cash flow management, it needs effective business debt management and close monitoring to avoid excessive debt situations. 

Importance And the Need for Business Debt Management

Maintaining the financial stability of a business requires effective business debt management. It supports the long-term viability of the business, secures business future funding and keeps the cash flow positive. Failure to manage business debt competently could have grave consequences such as reduced credit score, lawsuits for recovery of debt funds and even lead to the business going bankrupt. 

Conversely, enterprises with capable business debt management procedures are able to avoid financial difficulties, regulate business cash flows with a consistent growth cycle. Furthermore, sound business debt management strategies strengthen commercial platforms with investors, partners, and vendors who consider the business as a trustworthy and reliable partner for collaboration.

The Typical Causes of Debt Stress for Businesses

Businesses face debt stress for multiple reasons such as heavy debt burden, issues to repay fixed repayments schedules, variable interest rates, and cash flow management issues, all these leading to an ineffective business debt management loop. Such issues could create financial instability and even insolvency. Some of the typical sources of debt stress are –

Excessive Borrowing-

Businesses who are too reliant on borrowing could feel excessive debt repayment burden and interest payments especially during economic downturns or when a business faces unexpected challenges. Further, revenue reductions for longer periods or rising business expenses fulfilled through short term debts or lines of credit could add financial pressure. Entities that lack expertise in business debt management or are unable to manage debt have the risk of going insolvent or face bankruptcy.

Changing market conditions and market trends 

Interest rate changes could have a major impact on the cost of debt financing making it challenging to anticipate future costs and handle payback commitments. Inconsistent cash flows could cause irregular cash flows to pay off debt, lower earnings and manage operations during recessions.

Poor Cash flow Management 

Business cash inflows could be disrupted by client payment delays which make it challenging to pay off debt. Since it is challenging to properly manage debt and build future plans, a persistent sense of unpredictability could be a significant source of stress for organizations especially for smaller businesses. This is where experts like BankKeeping can help you in business debt management and managing all your banking needs from CMA data preparation to managing collaterals or lowering interest rates.

Business failing to generate sales 

Poor sales records or declining earnings are common sources of debt distress for businesses indicating that the business is going through financial hardships. Typically, businesses struggling to generate enough revenues resort to raising capital from external sources creating risks to suppliers and lenders ultimately leading to failure.

Lacking marketing operations

Lower demand for goods and services could result from sales growth which could force a business to close business operations or rise through competition as customers may choose to conduct business with rivals. 

Predatory loan/unfavourable lending terms and conditions

Businesses who have borrowed funds on unreasonable terms might be under immense financial stress. For instance, trade credits and business credit cards offer flexibility but usually carry higher rates of interest. 

Debt stress that may arise from any of the above mentioned reasons may critically hamper the business,its cash flows and even credibility. This in turn will lead to incapabilities in finding finance at favorable terms. Therefore it is of utmost importance that business debt should be managed effectively for the smooth functioning of the business.

Effective Strategies for Ensuring Better Business Debt Management 

We have so far discussed the meaning of business debt, types of business debt, importance of business debt management and the reasons that may lead to ineffective debt management. Herein, we will discuss some strategic ways in which an enterprise can effectively manage business debt to achieve the benefits derived from that effort. 

Assess Financial Situation for Better Business Debt Management

The primary strategy to ensure efficient business debt management for your business starts through assessment of its financial health. Closely monitor the debts and identify those with immediate requirements or carry a higher rate of interest. It will help to prioritize certain debts over the other on the basis of following-

• Debt Type- Whether short term or long-term debt, secured or unsecured loans, or whether comes with lower or higher interest rate.
• Lending terms and conditions- Make yourself aware of the repayment schedules, interest rate, applicable charges and penalties or covenants in regard to the loan. 
• Total Debt Load- Analyze the total debt with respect to sales and profits. 

Create a Debt Repayment Schedule for Better Business Debt Management

Businesses shall also create an efficient debt repayment structure considering the fact that certain liabilities will not impact the businesses with late payments while others might prove to be heavy on the business coffers. Therefore, prioritize your debts and liabilities those who require immediate attention. For instance, one consideration for deciding which debt obligation should be prioritized could be on the basis of whether the interest expenses from the same are tax deductible. 

Set aside a predetermined sum from your monthly revenues for debt repayment. If your business is struggling financially, renegotiate lender terms and conditions including better terms of repayment or reduced interest rates. 

Creating Emergency Funds for Better Business Debt Management

Budgeting is a critical element for smooth functioning of any business entity. Familiarize yourself with the sales revenues and profits, expenses including debt repayments from borrowings, and budget from the beginning of the quarter which covers fixed expenses, variable income and other income sources. 

Also consider unanticipated expenses, monitor profit and losses periodically and set aside monies for payment to supplier and creditors during budgeting. If required, consult any financial expert or accountants for assistance in budgeting.

Cash Flow Management for Better Business Debt Management

Regardless of how profitable your business might be, if it lacks a regular inflow at sometime your business particularly when it comes to managing debt.  Some of the ways to manage cash flows include-

• Improve inventory management- Proper Inventory Management for your business especially where it is involved in manufacturing, sale or wholesale of goods. Excess stock inventory or sluggish inventory could be usually one of the main reasons for your cash flow problems. 
• Timely invoicing and processing payments – Ensure the products and supplies are paid and invoiced on time, and update the credit terms to encourage cash payments quickly.
• Cut down on business costs- Business costs who do not impact the business goals and objectives should be cut down. Keep wasteful expenses to the minimum by reviewing non-essential spending on regular intervals. 
• Maintain Liquid Reserves- Build and maintain liquid cash reserves to cover unanticipated needs without having to borrow funds. 

Minimize Unnecessary Corporate Expenses for Better Business Debt Management

Considering the business costs which you could cut back on to save funds for debt repayment.  Use advanced accounting software to identify areas where cost reductions are possible. For instance, small businesses could consider reducing the rented office space leading to saving in rent costs or reducing manpower out of the total workforce. Further, engage in negotiations with vendors and suppliers. Do not hesitate to seek price discounts especially with suppliers who have a solid history of repayment, or you make large purchases or normally place bulk orders. 

Increase and Diversify Commercial Income Sources for Better Business Debt Management

Another effective way for efficient business debt management includes increasing the business revenues and diversifying revenue streams securely. In order to do so you could-

• Launch new products or services in the market which will draw more customers leading to a rise in additional income.
• Identify new markets or geographical areas to enhance your customers and sales records. 
• Leverage advanced software to identify areas where costs could be reduced, ideas to increase sales, automate operations and improve customer satisfaction.

Consider Debt Consolidation and Refinancing for Better Business Debt Management

Debt consolidation or refinancing are the two options that many businesses take into consideration when it comes to managing business debt. Using these methods will help businesses to save money by streamlining the whole debt repayment procedure. Debt consolidation entails combining several kinds of loan into one with lower interest rate making monthly repayments more manageable. Conversely, refinancing involves replacing an existing loan with a new one with better terms or lower interest rates to reduce debt burden and frees up cash flow. Thus, financially stressed businesses should take steps to-

• Combining many loans together into one with better terms or a cheaper rate of interest.
• Refinancing debts with higher rates of interest with loans with lower interest rates.
• Looking for government assisted initiatives or similar incentivized schemes aimed to assist businesses with business debt management. 

Implement Sturdy Receivable Processes for Better Business Debt Management

When handling accounts receivables from customers, it is crucial to have a robust collection mechanism in place. It could mean adding timestamps to different kinds of communications including emails, letters or telecommunication. In addition, establish an explicit course of action for maintaining and tracking the payments and communicating with employees so that everyone is aware about it. Likewise, strive to gather as much as possible information regarding your customers to secure payments for the goods sold or services offered to them.

Also, make it a priority to regularly follow-up with the customers late with their payments and request them to make payments within the due period. Established processes to track and follow-up on account receivables will also urge them to clear your payments on time. If a client has been given an extended period for payments, request to give a scheduled date for payment or where required visit their location. 

Negotiate Favorable Terms with Stakeholders for Better Business Debt Management

Another critical solution to ensure efficient business debt management for your business could be through engaging in negotiation with lenders and creditors to find a mutually beneficial settlement. Here are some of the ways businesses could practice it-

• Maintain open communication- The first step is to engage in open and honest communication with your creditors. Make proactive efforts to reach out to them and let them know regarding your financial situation. Communicating openly regarding your difficulties will foster trust and lay the groundwork for future negotiations. 
• Know where you stand financially- It is essential to fully comprehend your financial situation before engaging into negotiation. Create thorough reports that highlight the financial status of your business, including revenue streams, cash flow projections, and section-wise breakdown of costs. All of this will show your commitment to resolve your situation. 
• Propose alternative options for repayment- While discussing with creditors and lenders, offer alternative repayment options which could be advantageous for your business and doesn’t result in losses for them. For instance, you could seek extension in repayment period or reduction in interest rates.
• Look for alternative funding options- Finally, do not rely on any particular lender or creditor as your debt sources as it could lead to immense financial pressure for your business. Examine other financing choices such as invoice factoring, line of credit or leasing equipment, etc. Although every financing method has its own share of pros and cons, pick the one which suits your business model after thoroughly assessing your business requirements. 

Monitor Processes, Performance and Take Remedial Steps for Better Business Debt Management

Businesses with efficient business debt management control make efforts to monitor their financial situation and make necessary adjustments in their repayment strategies to account for the modifications in the financial health of your enterprise. You could take steps such as-

• Conducting periodical assessment of the debt repayments and financial performance of your business;
• Keep your debt repayment structure open to changes along with the growth of your business as well as with changes in market conditions.
• Remain up to date with financial news and any recent developments which could have a bearing on the lending policies, interest rates or on the state of the economy. 

Seek Professional Advice for Better Business Debt Management

Wherever required do not hesitate to seek professional advice for business debt management. You could seek advice from professionals with different fields of expertise including-

• Financial Advisors- Financial advisors with years of experience could assist businesses to create a strategic business debt management plan. 
• Accountants- Accountants could help businesses to optimize finances through efficient budgeting, cash flow management and tax planning, all of which could help a business to achieve maximum financial well-being.
• Legal Consultants- A legal consultant could offer guidance to resolve complex debt issues such as negotiation on favourable terms with lenders or navigating through insolvency like situations, etc. 
• BankKeeping – We service SMEs at every level to reduce their costs, helping them get more loans and being compliant at all times.

Managing everything on its own may be a tough task for the businesses, especially the SMEs.They may not have the bandwidth to handle all banking related negotiations, report preparations and even staff to be able to negotiate better with the banks even after having a sound and favorable position in terms of business stability. This is where you may need the help of experts like BankKeeping who will help your business at each stage of attaining a business loan, reducing interest or even negotiating the terms that may have any restrictive covenants thereof. The loan needs to be serviced and all necessary paperwork can be handled by experts so that there is no delay in submissions and no penalties levied by the banks. The experts can also ensure that the lenders or banks cannot charge extra interest than necessary or agreed upon. 

Concluding Remarks 

Every business organization needs efficient business debt management processes that allow tracking of debt repayments, ensures adequate resources are available for payments and payments from debtors are received on time. Businesses should strive to maintain smooth business operations which may include anything from efficient debt tracking processes, ensuring timely repayments to fostering healthy business relationship with lenders and creditors

Running a thriving business while managing debts might seem next to impossible but taking smaller steps could make a long-lasting impact for your business. Therefore, addressing debt related management concerns right away could reduce significant obstacles in managing your venture.  Also, make sure there is a course of action that uses these efficient business debt management techniques to guarantee a steady and prosperous business.