There’s not much worse when it comes to business than debt. But did you know there’s a good level of debt and a bad level of debt for small businesses?
It’s ok to be in a small amount of debt, in fact, it can be healthy. But there’s a fine balance and, if tipped, it can spell disaster for your small business.
The good kind of debt
As many people know, there’s a good kind of debt. The debt that’s involved with borrowing money to finance a business, for example, is a good kind.
That’s because this debt is helping you by raising extra revenue to fund your small business. In fact, this kind of debt is often a necessary part of a business journey.
It’s rare to have all the finances laid out in a neat little row before you commence trading, so more often than not, there will be some amount of debt when you start. And that’s ok.
In fact, it can be said that access to capital, and therefore debt, is the difference between growth and the death of a business.
Ditching the debt
Serious debt, the kind that weighs on your business goals heavily can creep up on business owners.
And if you’re not on top of your finances, it can be hard to ditch it. You can’t hide from it, nor can you run from it, but there are some things you can do to financially help your business.
There are some warning signs to look out for. Whether it’s poor cash flow, your inability to pay back your debts in a timely manner, your debt-to-asset ratio is out of whack, or there are low profitability margins, understanding how to manage and get your small business out of debt is important.
1. Look at your budget
Before handling any debt, you need to have a clear understanding of your budget. Identify your income sources, all of your costs—fixed and variable, including rent, utilities, wages and everything in between— and remember to factor in some unforeseeable costs.
Incorporating a bit of a buffer is crucial. If you need to, get some expert advice on how best to work out your income and expenses so you have an accurate representation of what’s coming in and what’s going out. Once you have a handle on this, you can work out what the gap is and how that can help manage your debt.
2. Reduce your expenses
While many businesses only spend money on what they absolutely have to, you may actually find that there are unnecessary expenses occurring on a regular basis.
Getting a handle on your budget will provide this information, and then it’s up to you to see where you can reduce your expenses. Even though it may seem easier to cut small expenses, in the long-run cutting some larger expenses may actually be more beneficial.
For example, moving your business to a smaller or lower-rent workspace may be a bit of a hassle, but it will save you money over time.
Take a look at what operating costs and services expenditures you can do without. Consider what’s absolutely necessary and then cut the rest. You may think you need those subscriptions, but you may not actually be using them, so why are you spending money on them?
3. Chase up any debts owing to you
Just like you may owe some creditors debts, there may be some money owing to you. So why are you waiting for it?
Sometimes, these late payments are out of your control, yet for others, a simple phone call can help speed things along. That’s why it is a good idea to make a list of all outstanding invoices and start to contact the customers or clients on the list.
While some clients may still push back on the payment, you may be pleasantly surprised when others pay up with a polite nudge.
4. Sell off any assets
While many small businesses have very few assets (with many working out of co-working spaces or home offices) there may be some assets you can do away with. Maybe there’s some computer equipment, an old phone you’re no longer using, or a car you no longer need because you work from your kitchen table.
For those businesses that work with stock, there may be some equipment you no longer use or even some inventory that you can’t part with using traditional methods. All of this is money tied up in your business.
Analyze your processes and see what can be done differently. Using different assets you may already have access and sell whatever you can. You may be surprised how much you get for it.
5. Talk to your creditors
Look at your debt from the perspective of the creditors. If you’ve ever been in the position of being owed money, as mentioned before, you understand what it’s like. However, don’t underestimate the simple process of communication.
You never know, there may be an opportunity to lower interest rates, consolidate your loans or even apply for some financial help.
Creditors may be open to negotiating better terms or sometimes they may be willing to accept a lower amount if you’re offering to pay it back in full. While it may seem scary to speak to the creditors, confronting the problem may actually help improve the situation.
Debt can be a scary word and sometimes it is an absolute necessity, especially when it comes to scaling a small business. However, taking on more than you can handle financially could potentially ruin the very business that you’ve spent years growing.