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3 mins read

Business chained to debt? These 5 steps will set you free?

DMP acronym

Some of the leading causes of small businesses failures are unrealistic budget, unnecessary costs, overexpansion and ignoring debt payments. Though borrowing makes sense for start-ups, sometimes entrepreneurs are borrowing large amounts of money without sufficient capacity for returning it. Business debt is like a labyrinth, it’s easy to go in and difficult to go out. As more time in it passes, you are getting more nervous, which further leads to panic and not thinking clearly about your possibilities. However, once you stop for a moment and see things more clearly, you’ll find ways of overcoming these problems. We’ll try to provide you some guidelines on how to accomplish that.

Think Ahead

There is no use crying over already borrowed money, but if you are just considering that possibility, it would be best to calculate your debt cover ratio first. It will give you a precise insight in the amount of money, interest rates and the terms, so that you can know, even before borrowing, how easily you will be able to pay it off. Debt coverage ratio is calculated by dividing net income by the interest and total debt service. If the results of calculations point out that repaying the money will be a stretch, then it would be the best to decide for smaller sum.

Make More Money

You can never go wrong with traditional way of dealing with debt and that is making more money in order to repay it. First thing that you can do is increase productivity, by improving employees’ skills via different trainings or new technologies. Changing your marketing strategy, for the better, could also have positive long term effects. You can increase cash flow by renegotiating terms with your vendors. If you feel like your plans are stalling because the business legal advice from your lawyer, consider changing professional services. Good cooperation brings more money. You can save money by downsizing on space in order to lower the rent.

Ask for Lower Interest Rates

If you are able to pay your credit card balance every month and avoid interests completely, that is the road you should take. Still, majority of businesses haven’t got that option. That’s why you can opt for different means, such as balance transfer to consolidate your debt in one credit card which will lead to lower interest rate. If you are a long-term customer with a good credit score in the bank and you pay regularly, you could ask for lower interest rate. Lower rates by one or two percents will make it easier to deal with the debt.

Fixed Rate Interest Loan

By the end of 2015, it is expected that interest rates will rise up and we don’t even know what to expect for the next year. That’s why it is better to ensure your current position when the interest rates are at record lows. A fixed rate interest loan means that a lender is maintaining current rate for an arranged period. This way, even when the rates go up, you’ll have the same monthly payment as you did when you locked the rates.

Debt Consolidation

This is one of the most efficient ways of managing your debt and paying it off quickly. Let us suppose for a moment that you have more than one loan with different interests, which is highly likely. Instead of paying them one by one, you can consolidate them into one singular account with the lowest interest rate. You can opt for secured (requires some valuable asset as a collateral and offer lower rates) or unsecured. Consult a financial advisor in order to determine which form of debt consolidation is the right one for your business.

Efficient debt management is what will make the difference between businesses that sink and the ones left swimming on the surface. If you think that you can’t deal with it by yourself, hire a financial advisor or consult a public accountant.


About the author:

Nate Vickery is an entrepreneur and business consultant with years of experience in giving small businesses and entrepreneurs financial advice. Nate writes for bizzmarkblog.com.

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