How To Be Better At Managing Business Debt

For some Australian business owners ‘debt’ is a scary word, but used in the right way, debt can be a fantastic tool for growing your business. External funding often becomes necessary for maintaining growth and ensuring success but it’s how you manage it that’s critical for the long term health of your business.

One of the biggest mistakes many SMEs make is taking on too much debt too quickly without the necessary cash flow to support it. They find themselves unable to sustain their growing operations whilst also servicing the borrowed debt.

To position your business for success here are six tips to manage your business debt more effectively.

1. Organise Your Creditors

Make a list of all your debt-related expenses and obligations whether that be a daily, weekly or monthly calendar. Include both fixed and variable expenses so you can adjust your calculations when rates or fees change. Note the interest rates and charges attached to each repayment so you know where your money is going and when. Having all your debts mapped out will help you not only stay on top of repayments but it also gives you a planning tool should you need to take on more debt in the future.

2. Prioritise Your Repayments

Spend time developing your cash flow strategy and part of this should involve how you intend to pay off your debts. Some businesses choose to pay down the smallest debts first to eliminate debt fast and reduce the number of creditors they owe. This is known as the ‘snowball method’ and sees momentum as each debt is cleared. Other business owners may choose to use the ‘avalanche method’ where they pay the highest interest rate loan first and see money saved on interest.

3. Negotiate Better Terms

Longer payment terms will maximise your current cash flow. Negotiating with creditors isn’t always easy but it’s a key aspect of effective debt management. To succeed in this make sure you gather and provide financial information about your business upfront. Showcase your business’s stability, revenue streams and future growth prospects. Consider presenting a financial forecast that demonstrates your capacity to meet repayment commitments. Don’t be afraid to seek professional advice prior to these conversations especially if negotiations are likely to be complex or if you’re experiencing financial strain.

4. Refinance Your Debts

By refinancing existing debts businesses can potentially secure better terms, lower interest rates and improve cash flow management. The first step should be identifying debts with high-interest rates or unfavourable terms that could benefit from refinancing. Do your research to explore what refinancing options are available to you and consider the risks and benefits of each. While refinancing can improve cash flow it can also involve fees or impact your credit score. Instead of refinancing, it might be worth looking at consolidating your debts under a single facility to make it easier to manage and you want to avoid “debt stacking” where you take on multiple loans from different lenders.

5. Reduce Your Debt Exposure

Consider smarter ways to fund your business that don’t rely on unsecured debt. You might wish to look at equity financing and bring investors in to receive returns on the business. Look at other alternative funding methods too. Invoice financing is a great option for B2B owners as it allows them to use current outstanding invoices as security, turning those unpaid invoices into cash. Instead of waiting 90 days for payment by your customers for your goods or services you have already delivered, you can secure that funding immediately to help your business grow.

6. Emergency Stash

One of the biggest challenges with relying on debt is that it doesn’t leave a lot of wiggle room for tough times. When your business is going well, set aside an emergency account with savings for a rainy day. Just because things are good now doesn’t mean your financial situation can’t suddenly change. Don’t make the mistake of taking on too much debt just because you can. A successful business owner is always planning and safeguarding for the future.

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