“Borrowing isn’t inherently bad; it depends a lot on what the debt is financing” (Stephen Moore, writer and economic commentator)
Taking on debt can be a good thing for a company. It can fund expansions, help you seize market share or diversify offerings. Handled incorrectly it can, however, lead to severe problems that could ultimately result in bankruptcy. Managing company debt is, therefore, something that should always be done alongside your company accountant, who can advise on whether taking on new debts is possible, whether the debt will pay itself off and how best to keep the payments down. Understanding just how debt works is, however, essential for any business owner and knowing how to pay it off before it becomes trouble is a skill that needs to be nurtured. These are our tips for paying off business debt.
1. Analyse and prioritise
The first step to breaking free from debt is understanding it. By knowing exactly how much you owe and to whom, and the different interest rates and payments involved, you get to take control of that debt. Look at the debts that are the most crippling and which cost you the most in interest each month and target paying these off first. Pay any extra money you have there and in the long run your bank balance will thank you.
2. Cut expenses
No matter how closely you monitor your expenses on a day-to-day basis, there are always items that can be cut to finance debt repayments. Your accountant can help you to analyse your monthly expenses and find areas for improvement. Whether you are making multiple small savings, such as trading to less expensive office coffee, and buying energy saving light bulbs or selling vehicles that aren’t currently utilised, each cent found will make a difference.
3. Shorten your payment cycle
Many businesses operate on an invoicing system which gives clients a certain amount of time to pay for a product or service. The standard amounts are generally 30, 60 or 90 days. While it may be beneficial to clients, having long payment cycles can unnecessarily hurt the supplier. By getting paid sooner, a business is able to maximise the interest it receives on the income, or, in the case of companies with debt, decrease the interest they pay on any loan.
4. Negotiate better debt repayment terms
If your business goes under, your creditors will lose the vast majority of their money. To prevent this from happening, don’t be afraid to approach the banks, or other lenders to renegotiate your payment limits, or interest rates. It is in your creditor’s best interests to ensure you pay (and to keep your business for the future!) so you might be surprised by what they are willing to do when you say you are struggling.
5. Consolidate debt
Depending on how your debt is currently structured and the different interest rates, it may be advantageous to consolidate that debt. Consolidating debt means taking out one large loan with a lower interest rate to cover all the other debts. Doing this can also help pay off your debt faster, as having only one monthly debt payment can feel more achievable than paying off numerous others.
6. Look closely at your pricing
Many people make the mistake of pricing a product based on their costs, plus what profit they hope to make. Accurately pricing a product is about so much more than that though. When pricing your products, you need to take into account the prices being charged by competitors, your true expenses in making that product and what your product brings to the market that is different from your competitors. It is distinctly possible you could be charging more per item, or conversely perhaps you could sell vastly more product if you simply lowered your costs slightly.
7. Diversify
Take a close look at your product offering. Are there things you could add that would be beneficial to existing clients? Getting a new product onto the market that you can upsell as an add-on to already successful products is a great way to generate extra income, which has thus far not been tapped. Diversification is, however, not necessarily just about adding new products to your catalogue.
Take a look at your current clients and your marketing. Are there other markets that might benefit from your product?Using your advertising budget to tap into groups of people who you may not have sold to before, is an excellent way to improve income and pay off that debt.
8. Inventory management
Incorrect inventory management can lead to your company buying too much product, clogging up your storerooms and having things expire on your shelves. Buying too little product can also be a problem as it means you don’t have it on hand when clients come calling and might miss out on sales. Both of these are expensive drains on a company’s accounts and streamlining your inventory and ordering could ultimately save you a significant amount of money.
9. Don’t lose sight of success
In difficult times, companies often make the mistake of cutting back on advertising, or downgrading the business in other ways, by retrenching key staff or not maintaining or upgrading equipment. This thinking will hurt the business in the long run as you lose market share or aren’t able to take advantage of new opportunities. Remember if your profits grow, it will be easier to pay old debts.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
© CA(SA)DotNews