Does the word ‘debt’ scare the living daylights out of you?! Or are you considering using debt to help your business grow?
It is inevitable that all businesses will have some debt at some point. Larger businesses are more likely to have debt actually factored into their growth strategy, while smaller businesses will be trying to avoid it all costs.
But is all business debt bad? And how can you as a business owner deal with debt in the right way?
Let’s look at debt as a whole - how to manage debt if it’s “bad” debt, but also when debt can actually be a good thing!
When debt is out of control: how to reduce debt in business
If business debt is keeping you up at night, wasn’t wanted, has gotten out of hand, or simply become too much, then this is “bad debt”. You need to act now to manage it and reduce what it’s costing you.
Here are our tips for reducing business debt:
- The first thing you should do is to assess your debts and the money owed to you. Take stock of all outstanding debts, how much, and what type of debt.
- Consider setting up a record-keeping system to help keep track of your financial situation and speak to an accountant or financial adviser.
- Get paid what you are owed – chase unpaid debts from customers or other businesses. Set up a system where you invoice customers quickly, maybe you can create sensible limits on the credit that customers can take out with your business.
- Prioritize your debt then speak to your providers. If you have loans, credit cards or any other type of debt, negotiate a better payment plan or interest rate. If you’ve made regular payments and your business is in good financial standing, an argument can be made to lower your rates.
- Consolidate your debt. Look to see if you can transfer existing balances to credit cards with a lower interest rate. For bank loans, you should call your loan manager and discuss options.
- Cut your costs. Negotiate with suppliers, look at all your subscriptions and see if they really are needed, look at your marketing costs and engage with cheaper ways to market your busines.
- Look at your business structure to ensure less chance of debt in the future. Can you look at your production line for ways to be more efficient? Is there a chance of streamlining your staff set up? Do you need to narrow your focus in terms of products and services?
- Get help from friends and family. If you are lucky enough to have supportive friends and family, you will find people are often really willing to help out. They might be able to inject cash into the business or assist with practical measures such as helping with a stocktake or marketing efforts, or simply being a good sounding board for your concerns and ideas which will in turn help you to think a bit clearer.
When debt is not all bad: using business debt for growth
However, not all debt is “bad”. Yes, debt that was unwanted or out of hand is frightening and stressful. But when used right, debt can have a huge range of benefits for a growing business with an effective plan for the future.
Borrowing money might offer you a new way to grow your business - as long as you're not overleveraging.
So, when is debt good?
- Debt can grow your business as borrowing can allow you to have the money you need to buy new equipment or hire new employees and fund growth. You can open new stores or expand your product offering. You can also ramp up your marketing efforts.
- Debt is tax deductable: this is a huge attraction for debt financing. In most cases, the principal and interest payments on a business loan are classified as business expenses and can be deducted from your business's income.
- Debt can help with cash flow management: you can buy stock before being paid, and create a strong environment to ensure a strong return for the business.
So how do you get started on the road to reducing "bad debt" and leveraging "good debt"? Just come and speak to us at Profacc!
Profacc Accountants & Financial Planning for all your finance and business advice. We can help you understand your personal and business situation, and implement strategies now so help you in the long run.