Tackling debt isn’t often the first thing on a director’s mind when pursuing improved profits, but can prove crucial for healthy net gains and business improvement.
Taking the time to tackle a business’ debt isn’t often the first thing on a director’s mind when considering how to improve profits, but focussing on debt reduction can prove a crucial tactic for promoting healthy net gains and overall business improvement. Many business owner’s first thoughts for producing better outputs will be to heighten sales, but in a world that’s still feeling the effects of the COVID-19 pandemic, many companies are still facing slower sales than their pre-pandemic rates. As such, now is an opportune time to look into lessening your business’ debts, and this guide will run through the key steps for targeting debt reduction in the next quarter of the business year.
Identify good debt and bad debt
Not all debt is inherently bad. ‘Good debt’ refers to money that is owed for something that will help generate income for your company over time, with business loans being a common example. A balance sheet is one of the main tools that should be referred to when considering your company’s good and bad debts, and it will also provide the basis for a liability check.
Manage the debt promptly and decisively
Business owners of small companies tend to rely on credit cards to make up for cash flow deficit. The best way to manage this is to document the liabilities, ranking them from highest percentage per monthly repayment. An example is a company that has a total of 20 credit cards in active use, and has a yearly percentage rate of as high as 25%, they can cease use of all the credit cards in about a year, with diligence and focus, and this will translate an increased interest rate by about 10% and will elevate the company’s cash flow.
Monitor the use of credit constantly
Various software tools are readily available for monitoring score and managing the credit with credit-reporting companies. Some are thorough in score management as well as examining the score-generating metrics, which include credit available versus credit used. It is worthwhile knowing that business owners get higher personal ratings from reporting agencies when their target credit usage is below 9%.
Obtain strategic new debts
Taking on some well planned debts can improve a company’s revenue. It allows you to cross-leverage and not add any additional burden. For example, the government-backed Bounce Back loan for small businesses provided in 2020. Even though it was a loan, it had a low interest rate and the option to pay back over 10 year terms meaning it could have been used to repay higher interest, more problematic debt.
Seek out available grants
An additional source of funding without the risk of reliance on loans is grants. Grants are most often available to qualifying companies who benefit a community, in this scenario a regional organisation might provide a grant to fund basic innovations. For those who qualify, grants can be used to improve a business or offset debt.
Form mutually beneficial relationships with the lenders
As the client in the marketplace, businesses can shop around prospective lenders before selecting a partner. Businesses can afford to perform diligent background checks on lenders before forming a relationship as this should be something that is nurtured and built on trust.
A known fact is that community credit unions provide greater services than banks and are more involved in seeking long-term relationships based on personal interactions. These relationships can be useful when the company needs debt-restructuring or loan service optimisation.
Reconsider or renegotiate your current debt
Economic downturns or crises are actually the best time to reconsider your current debt. In such situations, lenders are more likely to consider restructuring or a renegotiation of interest rates and loan payments, using the federal rates as a guide. They might also be able to access programs that support the present economic realities.
For more help and advice regarding your business debt, contact Voscap today on 020 7769 6831, or email help@voscap.co.uk, to speak with one of our business experts.
