Businesses contribute to the growth of the economy no matter what size they are. Despite this fact, most struggle with finance, some end up closing due to the lack of cash flow. Meaning there is no balance between their profits and liabilities. Debt management can be strenuous and demoralizing to an entrepreneur, but you can clear it with the right process.
Some of the factors that will land a business in debt
When debts accumulate without a strategy of clearing them, they can be a threat to a business. Some key factors that put a business in debt are listed below.
- Many businesses use financing: some entrepreneurs fund their business venture through their private resources. A large percentage seek out bank loans as a way of financing their business and actualizing the inventions. It means they have a liability to settle failure to which the bank may claim its assets to settle the loan.
- Unsecured debt is common: entrepreneurs seek unsecured loans to fund their start-up business. These loans don’t have collateral attached to them; hence the bank can access personal assets to settle the loan. On the other hand, some will use a credit card as a capital base for their enterprise.
- Advantages and disadvantages of using a credit card: unlike loans, credit cards take a short time to be processed and easily accessed. They give entrepreneurs an easy time to do transactions. Despite being easily accessible, they also accumulate high-interest rates.
- Business debt is common: debt can be quite damaging to any business; it’s tough to operate without owing anyone. Each business has its way of settling this severe issue to ensure it doesn’t affect its daily operations.
How business can handle its debt
Running into debt is not an uncommon issue, and many businesses are affected by it; hence business owners should find a way to clear the debts. Though it can be discouraging, a business can get back on its feet with a few steps. Below is a simple guideline to help you gradually settle your debt.
1. You should evaluate your debt
It’s essential to calculate your debt-to-income (DTI) ratio when you feel overwhelmed by debt to find your business position. The calculations will help you find out if your loans outweigh the profits, and you can come up with a solution. Here is how you come up with DTI;
- Calculate monthly total debt payments, including business loans and credit card debt.
- Find out your monthly gross income before deducting taxes.
- Finally, divide full debt payment by total gross to come up with your DTI.
The result should be below 36%; hence you are still safe and can manage your business. If the results are above 36%, then the business can’t sustain itself in emergencies.
2. Change your expenditure norm
If your DTI is high, it’s time you get to details and change the operations; if possible, you might end up cutting down unnecessary expenses. Scrutinize your business and find out what the business needs to change.
- Cut down expenses to reduce liability.
- Reduce the number of staff to a manageable number.
- Ensure you procure goods at wholesale pricing.
- Explore recycling energy to save on bills.
By analyzing your business, you can save it from bankruptcy by reducing its expenditure.
3. Work to increase sales and revenue
Upselling helps a business to gain its DTI balance. There are different ways a business can use to achieve increased revenue.
- Positive exposure of products or services: create awareness of your product through marketing and advertising. It will reach the public, and in turn, you get potential consumers willing to try them out.
- Increase product prices: raising prices will mean increased returns for the business.
- Change the sales tactics: the reason you are making low sales maybe relate to your sales strategies. You are likely to be targeting the wrong market, which will not make any sales. Ensure you reassess your tactics to increase sales and make more profits.
- Ensure customer satisfaction: it’s not just about making money; make sure your customers are satisfied. Also, you can develop good customer relations as it will contribute to your sales by referrals.
4. Settle existing debts
It’s beneficial for a business if it can settle existing loans. It will have to seek professional advice to find solutions. If a business cannot pay its debts, it can also opt to sell majority shares, meaning the new owner will assume full responsibility for the debts. Businesses have managed to resume their operations by merging with more critical and thriving businesses.
5. Pay in installments
A debt business can negotiate with its creditors and come up with an agreement. Installments allow it to pay the stipulated amount until the debt is cleared. It helps to ease the debt burden allowing them to carry out their operations as usual.
6. Don’t ignore sermons
Some creditors may opt to file a cause against defaulting payment. Business owners should avail themselves or hire legal representatives to appear on their behalf. Your presence helps negotiate for more time to settle your debts or come up with an agreement between the two parties. Being present also shows the court your seriousness to pay, and you don’t have intentions of defaulting your debt.
Debts are a threat to any business, but one can clear them and maintain a good reputation. They should not be ignored as it can lead an enterprise to bankruptcy forcing its closure.