It’s quite rare to come across a venture that runs debt-free. Every successful company has gone through a period where it needed some financial assistance from external sources. Loans, for instance, help ease businesses’ financial burden, but these are just a short-term solution. Piling up debts could cripple the operations of your firm. As such, it’s crucial to have a plan in place that will help reduce the total amount of debt owed by your company.
The hard truth is that any business, either new or established, can be a victim. Most entities that go bankrupt usually find themselves in such a situation due to poor debt management. So, how can you ensure that you don’t find yourself in a similar state? This article explains all you need to know about the subject. Read on to find out more!
Young businessman has chained big metal ball to his leg with debt written.
- Renegotiate Debt Interest Rates
One of the most effective ways to reduce your debts is to renegotiate the interest rates. Is the total amount too much for you to cover? Talk to your creditors and agree on a lower rate. However, doing so by yourself could be quite tricky given the fact that most creditors are too hard to handle when it comes to such talks. Having said that, you’ll need an attorney to help you in the negotiations. McCarthy Law PLC, for instance, will negotiate the interest rate, or even the debt as a whole, to a lower value.
The debt-restructuring process involves signing a new agreement with the creditors or collection agencies. This agreement may also include allowing the creditor to automatically withdraw a given amount from your bank account monthly. Debt-restructuring organizations will charge you a monthly fee, but it’s a much cheaper option than filing for bankruptcy.
Here are some of the benefits of renegotiating the debt terms:
- Reduced monthly payments due to the extended repayment period
- The legal bills may be reduced or eliminated entirely from the total repayments
- Consistent monthly installments will improve your credit score
- Liquidate Your Inventory
Liquidation can be defined as the process of converting assets to cash. If you have surplus inventory, it could be wise to sell and pay off your debts. Look for a product that isn’t moving and liquidate it. It’s better to sell it at a lower price than have it in your store while paying interest on it. Remember, inventory is where most of your money is tied up, so it would only be reasonable to free the cash and use it to reduce your debts. Sometimes, finding a customer to buy it could be difficult, especially if the item is stale. As such, you can go on and post it on eBay or Craigslist.
- Increase Your Sales
As earlier stated, your money is usually tied in the inventory. Therefore, it would be a prudent idea to increase the number of sales per day as a way of managing your stock. More revenue at the end of every month gives you enough room to adjust your expenses and pay off the debts more rapidly. Investing in your sales force is quite important as it will make the whole operation effective.
While its recommended to constantly find new customers, the ones you already have will also be very crucial in this strategy. Returning customers account for nearly half of the total sales by any company. So, it goes without saying that you’ll need to keep all of them if possible.
But, how do you increase your sales without raising overhead expenses? For one, you could employ free marketing strategies. For example, if you have a law firm, you should work on its online presence through SEO for lawyers or any other marketing technique. Since many people in need of legal help use search engines to look for credible experts, your law firm will pop up among the top results. The same can be done for any business, and, in the long run, you’ll end up making more profits.
- Be Tougher On Your Customers
You should always insist that the customers meet their payment terms on time. Of course, do so politely, without having to compromise on your relationship. If one promises to pay for the goods within a week, make sure you follow up and let them live up to their word. Some clients may need a little bit of pressing for them to pay what they owe.
For those who are always late, you can put a late payment fee clause to the agreement, which has to be signed by the client before your start working. A good business relationship is where both the consumer and the seller feel valued. If you strive to put this into practice, you could put your business in a better financial position, helping you pay off a substantial part your debts within a few months.
- Revisit Your Budget
What’s your company’s monthly budget? This is something that needs to be tackled even before you start attacking the debt itself. Perhaps, most of the financial issues you’re facing are because you’re falling behind in your monthly payments. If that’s the case, you’ll need to re-evaluate your financial plans. Make the necessary adjustments to fit your current situation.
A business budget should be able to give a clear indication of the fixed and variable costs. The latter can be easily adjusted depending on the circumstances. If you’re not sure of the steps to take, you can hire the services of a professional in this field. You can either consult your accountant or any reputable non-profit organization. Another alternative is to use an accounting software to automate your budgeting. All this will help you in the management of your costs, after which you can come up with an action plan to execute your debt reduction plans.
- Use Cash Payments Wherever Possible
One leading cause of business debt is the use of business credit cards to pay for all goods and services. Since this doesn’t look significant, it’s often overlooked when analyzing a firm’s operations. If you continue making all your payments through business credit cards, the overall debt will constantly increase. Using this method gives you a lot of freedom, and you could spend way above what you can afford.
One solution for this is to allocate a given amount of money for monthly expenses and stick to the budget. As such, you’ll only buy what you can afford that given month. Using cash or checks to pay for goods and services prevents you from worsening your current debt situation. Of course, this is an option that might not be suitable for everyone. Nonetheless, it’s important to be disciplined when it comes to your spending.
- Reduce Your Staff
No company is happy to lose their best employees, or any staff member for that matter. However, sometimes, your business may not be generating enough revenue to pay the workers, let alone settle your debts. If you don’t make difficult decisions when needed, the business could fail and more people will lose their jobs. Cutting down the number of your employees might help in your debt-reduction strategy.
It’s quite an effective way, especially when some of your employees’ salaries take up a significant percentage of the company’s total revenue. The good thing about this is that you can always go back and add more staff members in the future once your situation has improved. Of course, it’s recommended that you do this only when or if necessary.
- Sell Huge Assets And Lease Them Back
Sometimes, you might have some large items that are relatively new. These could be a fleet of vehicles or any other machine that can be sold at a significant price. Well, this could be your chance to ease the financial pressure posed on you by debts. What you need go do is sell these items or machinery and, then, lease them back for a few months or years. But, before you move forward with this strategy, you’ll likely need to consult an expert. .
If the numbers are not impressive, it might not be worth the struggle. Another option is to lease out these items. Of course, the amount received would be lower, but it might be ideal for you depending on the size of the debt.
- Consolidate Your Debts
If you owe different creditors, it might be a wise idea to consolidate all of them into a single loan. One of the main reasons why this could be an ideal option for you is its simplicity. Many banks have a well-structured procedure of doing this, and it’s relatively easy to follow. In addition, these banks are always looking to help businesses lift themselves up from such situations.
Secondly, the interest rate of the secure loan could be a lot less than that of individual debts. As such, you could substantially reduce the total amount of expenses incurred by your business every month. Consolidation of debts will make it easier for you to manage since you’ll only have to worry about repaying one loan rather than dealing with creditors individually. But, like any other method in this list, it’s important to research on how the move could impact your company. In terms of future loans, how will it impact your business’s credit rating? Consult a trusted expert before moving to the next step.
- Increase Your Margins
What’s considered a strong margin depends on the industry within which your business falls. Are you aware of yours? If not, check with your trade group to find out the benchmark margin used by your fellow entrepreneurs. Your company should be reaping at least a few units more than the benchmark margin. If yours isn’t, then, it’s time to make adjustments.
You can either raise the prices of your goods and services, or reduce the costs incurred in the production and delivery phases. In addition, you can opt for wholesale purchase of some raw materials rather than buying a few sets at a go. As you do so, make sure you don’t raise the overhead expenses. Also, don’t raise the prices of your items before checking what others are charging for the same products. If you’re not careful here, the whole situation could tilt in favor of your competitors.
- Eliminate Unprofitable Sales
Do you have some sales that generate returns that rarely hit the set target? Well, these could be the ones eating away a significant part of your revenue due to expenses. Sometimes, you might decide to stock a certain item simply because it attracts customers to your store. However, if it’s a poor-margin product and doesn’t get you the profits reported by others in the industry, then, this might be the right time to get rid of it.
As a general rule, always focus on items that get you margins worth the investment. In fact, ultra-low-margin items are usually more costly than the rest. Therefore, if you want to make your business more profitable, be smart about the things your order. Ultimately, you’ll be able to service your debts with a lot of efficiency.
- Hire A Debt Management Expert
Well, this is something that every business should do even when everything is running smoothly. Lack of enough knowledge on debt management is what drives most ventures into financial turmoil. What these experts do is that they usually analyze your operations from top to bottom. Then, they’ll let you know where you’re losing money unnecessarily and what you can do to alleviate such issues. Most of them can be expensive, but they’re worth the time and money.
Bottom Line
The best way to deal with your business debt issues is by changing whatever you can control. The profits you make are dependent on the number of sales you generate within a given period. It’s a lot more difficult to attract more customers to your store than to reduce your expenses. Therefore, it’s wise to get rid of anything that brings additional expenses, yet very little returns. For instance, paying for goods through your business line of credit or credit card will only push your debt higher. So, opting for cash payments could be significant.
Manage your inventory wisely, eliminate unprofitable sales, and reduce the number of your employees if possible. You can, then, go ahead and increase the number of sales you make per day or per month. In the long run, you’ll increase the margins and make more profits at the end of the month. Talking to your creditors is also worth a try, especially if all the other options are not giving you the desired output.
