Whether you’re just starting out or have been in the business world for a few years, there’s a chance you’ve racked up some sort of debt.
For those new to the scene, it can be a little daunting to see a large negative balance in your credit account, or have a personal loan to pay out — though with the right strategy and an understanding of how debt can work in your favour, you’ll be able to get on top of it without too much of an issue.
Understand What You Owe & To Whom
To kick off our guide, the first thing you’ll want to spend some time doing is finding out just how much you owe, and to which lenders.
If you’re carrying debt on credit cards, personal loans or even have a bunch of AfterPay instalments coming up, you’ll need to make sure all of this is under your control. It’s a good idea to keep tabs on your fees from micro-lenders too, as an expensive $2,000 loan might be hurting your bottom line more than a low-interest $20,000 one.
Once you have a good idea about what you owe, when things are due and the level of interest you're paying overall, you’ll be able to take hold of paying it down.
We suggest making a comprehensive list or spreadsheet with the following details included, because this will help you get a clear visual:
- The Amount Owing
- The Instalment Dates
- The Interest Amounts Charged if Unpaid
- The Lender’s Early Payment Fees
- The Type of Debt (Good or Bad)
- A Note on Level of Importance
With these points listed, you’ll be able to quickly spotlight the most costly debt and also determine which debts are most damaging to your profitability.
Always Pay Above the Minimum
Of course, we all know how important it is to pay our minimum instalment fees to reduce the amount of interest we owe, though it’s always better to pay a little more.
If you have any level of non-profitable, bad debt sitting in your accounts then you must make it your top priority to wipe this debt out first. When you have money coming in, you should do your best to direct as much of it as possible to your high-interest debt to reduce the fees and charges associated with it.
In the short term, it’s challenging to see the benefit of paying back the debt rather than investing into the business (or yourself), but in the long run, you could end up saving hundreds or thousands over the course of a year.
To add, getting on top of debt, in general, will free you up to grow as a business more quickly. Keeping those minimum payments and dragging out your interest for a more extended period of time is detrimental to any business. However, once it has been paid off, you’re free to expand and use all revenue to invest in growth.
For small, high-cost debt, it may be a good idea to consider cost-cutting measures to quickly redirect cashflow into this type of debt. The sooner costly debt is dealt with, the better.
Consider Debt Consolidation
When things become a little too sporadic, and debt becomes frayed across a variety of accounts and banks, then consolidation of debt should certainly be considered.
For business newbies, debt consolidation is essentially packaging all of your debts into one lower-cost option by using a personal loan or other loan to pay them out. In doing this, you can reduce interest paid, and get out of differing (and confusing) interest rates from multiple lenders.
Although this method is primarily used for emergencies, it is still an option should you have a worryingly complex debt situation.
A lot of banks offer fixed-fee and low-fee personal loans for this reason, and with this, you’ll be able to cancel out the high-fees of smaller micro lenders. For example, a $2,000 micro loan with 25% interest could quickly be consolidated by a loan with 8% interest.
Take a look at a few personal loans for additional information on low-cost debt consolidation.
Understand Good & Bad Debt
With almost all debt seemingly bad, there can be a difference depending on your business type and the type of loans you’re taking out.
In short, good debt is used to create, continue or assist in wealth growth and bad debt is tied in depreciating assets or products. A high level of bad debt could throw your finances in disarray, which means it should be a target for your payment plan.
To keep things as simple as possible, consider taking control of the following debts:
- Cars – Bad Debt
- Consumables; Food, Clothing, Tech Devices and More — Bad Debt
- Credit Card Debt — Bad Debt (unless used in wealth-growing activities.)
It’s good to note, however, that some forms of debt are essential to kickstarting business growth and product development. If you have to continually take out smaller loans, or frequent a credit card to get the ball rolling, this is considered good debt — so long as it has good returns.
Just be wary of when this good debt turnsbad because once things begin to spiral, you’ll find yourself trapped.
With those points in mind, it shouldn’t be too difficult to see the types of debt you must prioritize paying out.
Create A Fast-Track Payment Schedule
To end our tips, we suggest you consider developing a fast-track payment plan that you’re able to follow to grapple with business debt more easily.
It would be best to begin with a budget that allows you to cut personal expenses and grow your profits within the business. Once you have some extra cash on hand, use this to start a routine of paying off more and more debt each month.
Set up a calendar from a spreadsheet and commit to put in 10% or even 20% more each billing period. When you’re in a routine of paying a little (or a lot) more each month, you’ll be on the way to wiping our business debts quicker.
- Redirect considerable profits into loan payments.
- Build a budget that helps to reduce expenses and increase take-home cash.
- Follow a calendar that fast-tracks your repayments.
- Sell non-essential depreciating assets for repayments.
Keeping those points in mind, paying off debt a little quicker and saving big on interest won’t be all too difficult. However, it’s important to be aware of early payment fees and whether they’re going to impact your early pay-out.
If a bank hits you with a large fee for early repayments, and it’s larger than the interest you would have paid long-term, then make sure you don’t pay out this debt too early.
Small business debt doesn’t always need to be a murky, confusing and stressful ‘entity.’ All businesses have debt in one form or another, it just takes a little planning and calculated financing to get it all under control.
Our biggest tip is to always stay aware of your debts and keep a close eye on when good debt becomes bad, and to pay it down as quickly as possible.
As a business owner, you want your primary focus to be on sustainability in finances, and reading through this article is a great first step. A cool, calm and calculated approach to dealing with business debt is the best way to go about it.
Guest post courtesy of Rebecca Lee