Running a small business requires taking some risks. Debt is one of those risks, but it is also a positive tool for small business that is usually necessary in order to fund your growth. However, when circumstances change and your debt levels grow, it can keep you up at night. It is important to act early and put a plan in place to manage it.
Here are some useful tips from Xero to help you take control of your debts.
If you’re facing increasing debt, take action instead of hoping for the best. Stay sharp and aware of your situation. Use good quality accounting software (like Xero!) to keep a close eye on your outstanding debt and monthly payments. This information should be at your fingertips at all times. After that, your priorities will depend on the type of business you run and how flexible your suppliers are willing to be. The following payment priorities are suggestions, but the actual order is for you to decide:
You may be able to renegotiate your bank loan so it's spread over a longer term, to reduce the interest payments and also the monthly repayment cost. The bank may want to charge a higher rate due to the perceived increased risk of default, so you won't save as much money as you might like. Even so, this can give you some breathing space.
Talk to all your creditors. Explain the situation and make it clear you have a comprehensive plan for resolving it. Stay positive – tell them you want to pay in full but need to renegotiate terms for that to happen. They should understand that it's in their interest to accommodate your request. After all, if your business fails they'll get nothing back. Be proactive here. If you approach your creditors before they start chasing you for missed payments, they're more likely to take you seriously and agree to your terms.
Easier said than done, of course, but there are ways you can boost short-term revenue. By taking action, you could reduce your debt payments enough to get you back on track.
Think about where you can cut costs. Use accounting software to list your largest outgoings and see where you can make reductions. For example:
You might feel like you need to cut costs to the bone when debt looms over you, but sometimes it can be counter-productive. Don't assume cutting costs will automatically save you money. It's where and how you cut costs that matters.
For example, if you slash your marketing budget you might save a lot of money in the short term, but you will lose potential new clients. Cut your shop floor space and you'll save rent, but reduce the range of stock you can display to customers. Make some of your staff redundant, and you won't be able to handle any larger contracts that come your way.
Cut when you need to, but do it sensibly. Before you start, use accounting software to forecast the financial impacts of different cost-cutting options. Trim the fat out of your business, not the muscle.
This will be difficult. A new business that's free from debt is a better investment proposition than one that's having financial problems. Still, you have choices:
More than a third of business owners are less than comfortable about their levels of debt, so you're not alone. Do everything you can to keep your business running, and talk to local business advisors to see what help they can offer.
With luck and perseverance, you'll be able to turn your business around. But if things don't improve, you may have to consider closing your business and declaring bankruptcy. That would hurt, of course, but it doesn't have to be the end of your dreams.
Many entrepreneurs fail in business at least once before finding a successful strategy. And as long as you learn from the experience, you may be able to bounce back stronger next time.
All Accounted For can help you assess the situation and create a repayment plan. This will include your business priorities and your obligations such as payroll, suppliers, tax, insurance and other bills.
So, if you're in debt, come and talk to us about your options.
Original article link: https://www.xero.com/nz/resources/small-business-guides/business-management/manage-debt/