Financing can help your company grow and assist you to reach the goals you've set for your business. But it's vital that you understand what type of debt is helpful and just how it can impact your company, particularly when you're attempting to climb out from under already established debt.
Our guide will clarify the main difference between good and bad debt and provide strategies to get the business not in debt quickly.
What Is Business Debt?
Debt is money borrowed by one entity from another entity that you will find repaid with a certain date.
Many businesses borrow money to create large investments or purchases they couldn't make by themselves.
Business debts are money a company borrows from a creditor or lender to cover business expenses. The company agrees to pay the cash back, usually with interest.
- Good debt: Plays a role in the development and goals of your business and may increase your business's future net worth
- Bad debt: Can hamper your business's capability to progress by negatively impacting its finances and decreasing your business's future net worth
Keep in your mind that every clients are different. The best or healthy quantity of debt for a business will be different. For this reason you need to have a debt plan in place for that business's loans. It helps to ensure that you'll get the most benefit out of your debt which you're in a position to handle rid of it.
What Would be the Advantages of Good Business Debt?
There isn't one specific type of debt that is bad or good. Good debt reflects your business's goals and finances. What may be good debt for just one business might be bad debt for another.
Generally, good debt includes a lower rate of interest and favorable repayment terms. Despite its advantages, you'll still need to comprehend the way the debt will impact your company and have a plan in position to handle it.
Here are some other benefits of good debt:
- Funds growth: Good debt can be leveraged to assist achieve business goals like expanding, project funding or giving your company a more competitive advantage.
- Tax breaks: Business debt interest rates are tax deductible, which means you might be able to acquire some money back during tax season.
- Less risky than equity: Good debt could be a less risky or cheaper option than getting funded through equity because shareholders or investors might want better pay of return on their investment. Rather than pay dividends to multiple individuals or entities, you may just repay one lender a treadmill line of credit.
What May be the Impact of Bad Business Debt?
If good business debts are anything, same with bad business debt. But there's no specific kind of debt that's bad. Bad debt hinders your business's ability to progress and hurts its finances because there was no debt plan in place. This can be especially fatal to smaller businesses.
The impact of bad debt on business owners may include:
- Collateral repossession: Should you had a secured business loan and backed it with property, equipment or inventory and you default on your payments, the lending company can repossess the asset.
- Risky investment: If your business already has a lot of debt, a future lender may consider the business a riskier borrower for future loans and/or lines of credit. That can make it harder to apply for additional funds.
- Making payments: Companies that possess a large amount of debt or debt with high rates of interest or debt with strict repayment terms may find it difficult to make payments if their income drops.
- Bankruptcy: Your business may get to the point where paying back your financial troubles doesn't seem possible. If you can't negotiate a debt consolidation, you may have to file for bankruptcy.
- Closing or dissolving: If your debt negatively impacts your business to the point it makes no sense to keep it open, you may have to close or dissolve your business. Should you close a business with debt, you'll likely have to resolve any outstanding debt with your lenders or creditors.
When taking a look at different kinds of debt, try to stay away from debt that's tied to high interest rates, has lots of fees or strict repayment terms that may be difficult to meet. And ensure that you are while using money on assets that won't depreciate.
How Would you Get Out of Business Debt?
Whether it is good debt that helped you reach a goal or bad debt that is hindering your growth, getting out of debt can free up more funds for the business. You can take steps to get out of business debt with a few planning and credit card debt reduction strategies.
Use these ways of help find practical solutions for your business:
1. Review your current business debt
An in-depth analysis of your business finances will help you discover what debts you have, your financial allowance where you can start implementing credit card debt reduction strategies.
Here are a few tips for reviewing your budget and debts:
- Work having a professional: Work with a financial advisor and/or your business's chief financial officer to put everything out and ensure you've measures in place for proper data entry and tracking.
- Review often: The in-depth analysis of your finances should become routine. Reviewing your money and budget every month will help you remain on surface of everything.
- Use what you can access: Without having a financial consultant or CFO, consider using financial management software to help keep tabs on your business's finances. The program may make it easier to see what's coming in, what's going out, what debts you've and which debt(s) you should tackle first.
2. Reduce business costs
While reviewing your business finances, you might find some items or operating costs you are able to cut to take down budget. Search for things like subscriptions, vendor contracts or other nonessential expenses. You should also consider the outcome associated with a one-off purchases as you move forward.
If you cannot remove certain expenses, you may be able to lower them. Attempt to negotiate lower subscription prices or contracts and take advantage of promotional discounts.
3. Produce a repayment strategy
Once you've outlined your present debts and budget, it's time to produce a repayment strategy. Focus on paying off any bad debt unless you've identified a specific debt which makes more sense to tackle first.
This is where using a professional can be quite helpful. They are able to assist you to create a repayment schedule for your business. If you cannot work with a professional, create a detailed assessment of the finances (aka a company debt schedule) by listing out all of your debts as well as their details, such as the lender name, your debt amount, the repayment terms, etc.
Here are a few methods to repay debt faster:
- Extra or larger monthly obligations: To pay for your debt off sooner, make payments which are larger than your minimum payment per month or make multiple payments throughout the same month. If you were able to free up additional cash by reduction of business costs, consider putting those funds toward extra or larger debt payments.
- Snowball method: Pinpoint your smallest debt and pay it off as soon as you can. Once it's paid off, roll the number you were putting toward the old payment over the payment per month for your next smallest debt to pay it even off faster. Keep moving onto your next smallest debt until you're debt-free.
- Avalanche method: Laser in in your debt using the highest rate of interest and repay it as quickly as you are able to. Once it's paid off, roll the amount you paid around the first debt on top of the monthly payment for the debt with the next highest interest rate, and so forth. This method should help you save time and money because you're focusing on your highest-interest debts first.
- Consolidate or restructure: You may be in a position to consolidate multiple debts right into a single loan or restructure your financial troubles to lower your rate of interest and make your payments less expensive (more on these options later). In case your debts are simpler to manage and you pay less in interest, you may be able to pay it off faster.
4. Contact lenders
It's important to reach out to your lenders and creditors if you're having difficulty paying your debts. You may be able to renegotiate your repayment plans or any other loan terms (like the interest rates).
5. Consider refinancing expensive business debt
You might want to refinance debt that is draining your wages and hurting your company goals. Whenever you refinance, you apply for any new loan to pay off your old loan. You can find a lower rate of interest or a longer payment term having a loan refinance.
When you refinance financing, you go with the loan process once again, which means any fees that come with obtaining a loan will have to be paid. To entitled to the loan, your credit rating and debt-to-income (DTI) ratio will need to meet your lender's requirements.
Refinancing is different from debt consolidation and restructuring. We'll discuss each option afterwards. You need to know how they work, how they differ and how they might help you.
6. Increase your income
When you've more income, you have more money to repay debt. Find ways to increase the money flowing to your business. Just remember more income does mean paying more in taxes.
Here are some ideas to increase your business income:
- Upsell by encouraging people to upgrade their order(s)
- Create customer loyalty programs
- Optimize inventory
- Add more products or services to your offerings
- Collaborate along with other businesses to capture new customers
- Increase your prices
7. Temporarily pay with cash (if you're able to)
Explore paying with cash temporarily to avoid piling on more interest-generating debt. And save your receipts! It's important to keep an eye on all the expenses you pay with cash so when it comes down time for you to do your taxes, there is proof the expenses were created.
Consider paying cash for:
- Office supplies
- Unexpected small expenses
- Gas for that company car
- Nonessential expenses
Using cash for business expenses (no matter how small) shouldn't be a long-term strategy and is not an important key to getting out of debt. But it might help!
What's the Difference Between Refinancing Debt and Consolidating Debt?
Understanding the difference between refinancing, consolidating and restructuring your financial troubles can help you decide which option is best for you.
- Refinancing: Whenever you refinance, you are taking an existing debt and negotiate new terms – much like your payment per month, your interest rate or perhaps your payment term – having a lender or creditor. You refinance loans by swapping out your existing loan for a new loan. If you are refinancing credit card debt, it can be done with balance transfer promotions to new, low-interest cards.
- Consolidation: Consolidation combines your existing debt into one new debt (usually a loan). Your brand-new loan may have a lower monthly payment, a reduced interest rate along with a new repayment schedule that makes paying off your financial troubles more manageable. You may also consolidate multiple credit card debts into a single business loan.
- Restructuring: When a debt is restructured, your monthly payments are lowered by adjusting the interest rates or even the debt payment term. Debt restructuring usually happens when you're finding it difficult to repay your financial troubles, and you have to negotiate a brand new add up to pay back. It's much like refinancing, however with refinancing, you receive a new loan (or credit card). With restructuring, you modify an existing debt.
Destroy Business Debt
Whether you choose to apply all the credit card debt reduction strategies we've outlined or simply a few, be sure you know how each strategy will impact your company.
If you can, work with a financial professional to help you analyze your business's finances and are available track of a method you really can afford and manage.
