Debt Management Handbook for Businesses: 8 Strategies and Solutions

October 4th, 2021

Running a business involves a lot of risks and challenges, and managing financial obligations is one of them. There may be apparent or indirect reasons why your company is in debt, but the good thing is you can get out of it..

On a certain level, debt can be a good thing. For instance, it allows you to have funds to purchase assets, expand research and development initiatives, and pay down bad debt. This infographic will serve as a handbook for business owners like you, to help you navigate the challenges that come with settling financial obligations.

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What is Debt Management?

Debt management refers to the strategies used to reduce or pay off debts. It involves various steps and activities such as negotiating with creditors for a reduced interest rate, creating a budget, or offering discounts to generate more sales. In essence, it means anything that’s done to reduce, reorganise, or eliminate your financial liability.

4 Reasons Businesses Go into Debt

There’s a range of internal and external factors that greatly contribute to why businesses go into debt. As a business owner, familiarise yourself with these factors so you can strategise to avoid them.

  1. Dry market season

The dreaded “off-season” can substantially impact businesses. Once the peak period ends, a slow period begins and operations come to a halt. To make up for the revenue loss, smaller companies take out a loan to sustain their operations.

  1. Lack of plans

Failure to do financial planning can lead to poor decisions. For example, if a company were to develop a new product, it would need to study what the customers need, how it works for them, and how much production will cost.

If it doesn’t map out these essential details, it runs the risk of low profitability. And no matter how useful the product will turn out to be, it won’t help much if it doesn’t generate revenue. Worse, it can cause the company to lose money and incur debt.

  1. Bad cash flow management

Keeping track of funds coming in and out of your business is essential in managing cash flow. Ensure you understand where they are coming from and where they are going. When businesses fail to do this, issues may arise that can affect revenue generation. With bad cash flow management, businesses sometimes take on more debt to keep up with existing loans.

  1. Impact of economic downfall

An economic lull or recession can lead to reduced revenue. And if larger companies pose competition, it can lead to bankruptcy for smaller ones. To avoid losing considerable funds and stabilise their finances, small businesses often resort to financing their business activities and use other forms of loans.

8 Strategies and Solutions to Manage Business Debt

Don’t fret —your debt problems have solutions! With careful planning and execution, you can bounce back from this. Here are some of the strategies you can start with today:

  1. Organise your outstanding debts

The first step in managing your business debts is to organise them into categories. For each liability, include important information, such as:

  • remaining balance
  • payee/creditor
  • minimum repayment amount
  • due date
  • interest rate

You can put together this information in a simple spreadsheet or even with just pen and paper. What’s important is that the details should be specific. This will make it easy for you to see what you owe and when you should settle it, helping you make a game plan moving forward.

  1. Assess your current financial position

When tackling your business debts, you need to have an understanding of your current financial situation. Where exactly is your money going? Is it being used wisely? 

Study your financial statements, and then come up with an analysis using a project management or budgeting tool. These are business finance fundamentals that will give you an idea of your financial status, which can be useful in settling your liabilities. 

  1. Review your current assets

Assets refer to the resources that generate revenue for your business. They are classified as either current (or short-term), fixed (or long-term), tangible, intangible, operating, and non-operating. If your current assets exceed your short-term liabilities, you have enough funds to pay your smaller debts.

Using a balance sheet is a great way to keep track of your assets. 

  1. Find ways to increase your revenue

Boosting your short-term revenue can help reduce your debts to an amount manageable enough to get you back on track. Here are some steps you can take:

  • Offer your customers reduced prices to improve your cash flow.
  • Tailor your products or services to suit your customers’ needs and maybe charge a mark-up.
  • Chase late payments from customers. You can offer discounts or rewards to clients who pay upfront.
  • If you have stock that isn’t selling, try to adjust your purchasing habits or look for suppliers that offer rights of return for unsold goods. This will free up some space for products that may sell and increase your revenue.
  • Use social media to promote your products — it’s free, and you can reach thousands potential customers with just a single post.

Simply put, the more cash you can generate, the faster you can reduce your business debts. 

  1. Reduce unnecessary business costs

While there are unique considerations for business liabilities, in some ways, you should manage them like personal debt. Minimise your spending to save extra funds you can use to pay off your balance. You can do this by identifying  areas where you can cut costs. 

Here are a few examples:

  • Reduce the space you rent or lease, especially if you’re not using it all.
  • Consider asking some of your employees if they’re willing to take on multiple roles instead of hiring new ones.
  • Hire short-term consultants instead of full-time employees. 
  • Negotiate with your suppliers and ask for discounts.
  • Re-evaluate your advertising and marketing contracts that yield minimal returns. Even little things can add up to a substantial amount.

Identify any expenditures you can do without. Decide which services and operations are essential, and then cut expenses for the rest.

  1. Prioritise payables

One debt management strategy you can adopt is to first pay your liability with the highest interest rate. Debts with bigger interest rates generally cost you more money in the long run than those with lower interest rates.

If you decide to follow this method, list all your liabilities by interest rate from highest to lowest. Pay the minimum amount owed on each of them, but use any extra money on the debt with the highest interest rate. After you’ve paid off that balance, tackle the next biggest interest rate until you’ve taken care of all your financial obligations.

  1. Revisit your budget

Assessing and reworking your budget is crucial in every stage of the business life cycle, and it’s all the more important when you’re trying to reach your debt elimination goals. Once you have identified your priority areas, adjust your financial plan accordingly to conform with the cash flow.

Your business budget should include the essentials, such as your income sources, variable expenses, and fixed costs. You should also take into account funds for your loan repayments.

  1. Apply for invoice financing (aka Debtor Financing)

Invoice financing lets you borrow money against the amounts due from your customers. It enables you to get cash earlier than you could if you had to wait until your clients paid their balances in full. This business financing approach can help improve your company’s cash flow, allowing you to have funds to pay down your debts and sustain your operations.

Paying Off Your Debts May Be Challenging, But It’s Possible

Settling your business debts may sound like it’s a long shot, but it’s possible. Reducing unnecessary costs and increasing your revenue can help you pay down your liabilities. Negotiating with your creditors and sticking to your debt management plan are key to taking your financial obligations off your shoulders.

If you are a business that is going through financial problems, Earlypay offers competitive invoice financing options.

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If you'd like to learn how Earlypay's Invoice Finance & Equipment Finance can help you boost your working capital to fund growth or keep on top of day-to-day operations of your business, contact Earlypay's helpful team today on 1300 760 205, visit our sign-up form or contact [email protected].