What can you do if your business is in debt?

Even a small size of business could feel the need to borrow money. A guaranteed inflow of cash is not possible regardless of the business strategies you implement, courtesy of external economic factors that are beyond your control. Reducing business debt is not a cinch when cash flow is quite tight.

If your business is plunging into an abyss of debt, you will find it difficult to meet your business expenses. The size of the debt will continue to accumulate if you miss any payments. The more you delay settling your debt, the larger the debt will become over time. In the end, you will feel like you are lost in insurmountable debt and forced to wind down your business.

Many entrepreneurs take out start-up business loans for bad credit to meet the initial cost, but they struggle with cash flow. According to studies, more than 70% of businesses shut down at the end of their first year, and 30% close down at the end of their fifth year. It is not surprising that many entrepreneurs become overly optimistic about their business revenues.

What should you do to tackle your business debt?

Here is what you should do to whittle down your business debt:

Consolidate your loans

If you have several loans, you should take out one large loan to consolidate all of them. Consolidating involves combining all outstanding multiple loans at lower interest rates. However, low interest rates will be approved only if your credit rating is good. It is enjoined that you must consider this option before falling behind on the payment. Most of the lenders do not give the green light to consolidating application if your credit score is not stellar.

Consolidating can be an effective way to whittle down your business debt. As you will pay down the debt over an extended period, monthly payments will be more manageable. The idea of consolidation is worthwhile only when you manage to avail yourself of lower interest rates. Compare the interest you have to pay down on a consolidation loan with the interest you have to pay down on each loan separately. If it helps you cut back on interest payments, you should choose this alternative.

It is likely that you do not have a good credit rating. If that is the case, you should consider taking out a debt consolidation loan for people with bad credit. A few lenders might approve these loans despite a poor credit rating, but interest rates will be quite high.

Reduce business expenses

Look over your business expenses. They might be more than your business income. Since your business debt is high and you are looking to reduce it, you should prefer zero-based budgeting. It includes budgeting for every month from scratch rather than basing your expenses on the previous month’s spending. The ultimate goal would be prioritising essential expenses and then other expenses.

It is crucial to cut the cost of running a business. You may be tempted to reduce cost by compromising on the quality of your product or service, but this would further push your business on the edge. When your products’ qualities are reduced, your customers will leave you for your competitors. Once your customers are disappointed, they will never return whether or not they spread negative words against your business.

Improve cash flow

A disrupted cash flow is one of the biggest reasons for a business to wind down within five years. While it is essential to cut back on your business expenses, you should also think of improving your cash flow. There is no doubt that your cash flow will improve by reducing your business expenses, but you are supposed to focus on hard core strategies, too.

An example

You should be able to clear the inventory faster. When inventory takes a lot of time to be sold, cash remains blocked. It means you will struggle to have enough cash to meet your business expenses. As a result, you will be promoted to borrow more money. Then, you will find it even more difficult to settle your dues. This poses a threat to your cash flow. Problems become more serious. Eventually, you fall into a deep hole of debt.

You should also focus on the billing cycle of accounts receivables. It is natural to extend a repayment term for your customers who have been in touch with your business for a long period of time. You often forget that your business does have some expenses to meet. If you do not get paid from your customers on time, how would you be able to discharge your debt, pay suppliers, and meet other expenses?

You might not realise at the moment, but reducing the payment term will help you improve your cash flow. Try to get all accounts receivables paid within two weeks. This will improve your cash flow so that you can meet your business expenses smoothly.

Use a penalty system for those who do not pay on time. You cannot run a business by being emotional. If your clients do pay you on time, you should charge a penalty. Keep sending them reminders so they do not miss a payment.

Increase sales

Sales are the best revenue. The best way to deal with your business debt is to increase sales. Identify the gaps in your sales and try to fix them. If possible, offer customers discounts and schemes. Stop selling a product that does not have any or very little demand. Try to introduce a new product line that seems more profitable. Do research why some of your products have fallen out of people’s favour.

The bottom line

If your business is in debt, you should try to reduce your expenses so you can release some money to settle them. In addition, make strategies to increase your cash flow. Get all your accounts receivables paid on time. Reduce the payment term. Above all, you should increase your sales. This is the best way to quickly discharge the debt.