Debt can be a useful way to start your business, but without proper management and care, things can turn ugly quickly.
- Although many people believe that having debt is innately negative, it can be a useful tool in the early days of starting your business.
- The average small business owner has $195,000 worth of debt.
- Some of the benefits of using debt as capital are that it allows for lower financing costs and makes for better tax savings.
Debt can be a useful tool to start off with your business, but all small business owners need to ensure that their debt is working for them and not against them.
When a considerable amount of expenses is leveraged for servicing debt rather than investing in your business, small business firms start struggling and this can make them fall into trouble when debt and expenses outpace revenue.
Whether you're handling late-paying clients or going through a sudden drop in company revenue, multiple issues can make business owners be overburdened with debt.
For every problem, there's a solution, and small business debt is also not an exception. As an owner, you need to get on top of your debt by making the most effective New Year's resolutions.
Although you might think that it's too late to resolve now, in the world of finance, it's never too late to make positive decisions. If you're not feeling comfortable with the levels of debt that your business is carrying, here are some tips to take into account.
How much debt does the average small business have?
According to USA Today, the average small business owner has approximately $195,000 of debt. Nevertheless, getting a business loan, line of credit or business credit card can help you manage and repay your business-related expenses.
Take a close look at your debt.
Are you managing your business finances through spreadsheets? If you answered yes, you're probably not aware of your total debt.
If you're still not aware of the total debt that you owe, you can never make a plan to get out of it. You require having this information always at your fingertips.
You may use small business accounting software like Xero, which allows you to see exactly what you owe and also works out the optimum debt level for your business.
Prioritize your business debt.
As you owe too many debts, you should be aware of the fact that not all debts are created equally. Ask yourself what would happen if you didn't pay a particular debt and make decisions about prioritizing your debts based on the seriousness of the consequence.
The more unpleasant the result, the higher priority the debt is. Most often, payroll takes the first position as if people don’t get paid at the right time, they would have no incentive to work.
Before any payments to suppliers and vendors, focus on clearing payroll.
Renegotiate your terms on bank loans.
How about some negotiation with the bank? If you are confident about your convincing skills, you can give it a try.
Renegotiate the terms and conditions of the bank loan after relating your current financial situation. If you think you could do with short term cash, you could ask for higher interest rates so that you could reduce the monthly payments easily.
Talk about an alternative payment plan.
When you're facing trouble paying off your monthly loan installments, you could speak to your creditors before they come behind you and ask for money.
If you can reshape an alternative payment plan and show them how you would maintain your payments, that would be more receptive. After all, any adjustment is done in their best interests. If you go under, they won't get a penny from you.
Should you refinance your small business debt?
When none of the above-mentioned steps work, you might consider refinancing your business debt. Take a look at some valid reasons to consider refinancing.
Refinancing makes life simpler.
If you're tired of juggling between multiple due dates, bills and interest rates, refinancing is the answer to all your worries. Refinancing will provide you with a single loan and you can just keep track of one payment rather than several.
Refinancing saves your dollars.
Saving is one of the biggest reasons to refinance. You can switch to an interest rate which is much lower than that you're currently paying. Interest rates keep you in debt for a longer time, and if you can decrease the rate even slightly, you can save some big bucks in the long run.
Refinancing helps grow your business.
You can improve cash flow by refinancing your short term debt into a long term loan. There will be more capital available every month, and you can concentrate on what matters most.
Refinancing boosts your credit score.
Combining your business debt into a single payment could refurbish your credit score. Whenever you refinance a commercial loan, you might see a sudden jump in your credit score as this reduces your credit utilization ratio.
Henceforth, whenever you're burdened with excessive business debt, keep in mind the above-mentioned options, including refinancing. Search for a better loan to profit in such a situation.
Why is debt good for business?
If you are wondering about the pros and cons of having debt when you have a business, according to Chron, they are as follows:
Lower financing costs. Debt requires lower financing costs as compared to equity. Debt, unlike equity, is finite. This means you are required to make periodic payments for a specified amount of time until the debt is repaid.
Optimize the effect of financial leverage. Debt can also be beneficial as it allows you to maximize the effects of financial leverage. This is because when a company owner uses debt as a method of securing additional capital, equity owners can keep extra profits that are generated by the debt capital.
- Tax savings. Another benefit of using debt for business is that it helps with tax savings. Using debt makes it possible to lower your company's taxes, because tax rules make it possible to use interest payments as expense deductions against revenues.
Conversely, why is debt bad?
On the other hand, according to Kabbage, the cons are business debt are as follows:
Repayment. Despite the benefits, the debt must be repaid in full.
High-interest rates. Debts are associated with interest. Often times, the interest rates for your debt are higher than most wish to pay.
Credit rating. Having debt can also affect your credit rating. Especially if you are borrowing large sums, this can adversely affect your credit score until the debt had been paid off.
- Cash flow: Having too much debt can adversely affect your cash flow. This is because your lenders typically expect the debt to be repaid in equal installments regardless of your income.