Are you burning the midnight oil trying to reconcile your balance sheet? Even worse, is your business running multiple debts with the debtors constantly knocking on your door threatening to auction the business?
Well, it’s likely you dug up this grave yourself. While it’s necessary to incur debt, when running your small business, too much of it can strangle your cashflow. This may expose your business to several risks including little too no money to reinvest.
According to Experian, an average small business owner in the US has a debt of $195,000. In this article, we’ll dive into the tips you can use to run a debt-free business.
#1. What’s Your Debt Status?
To get the answer to this question, it’s crucial to go through your financials to establish the total amount of debt you owe. When doing this, sort the debts according to monthly payments and interest rates.
Also, classify them according to lines of credit, business credit cards, and business loans, not forgetting any payments due to your vendors.
By classifying the debts, you’ll have a clear plan on which debt to clear first. Several financial experts advise starting with the debts with the highest interest rates. In addition, it’s important to clear all debts within the first 12 months to avoid the risk of bankruptcy.
#2. Cut Down on Costs
One of the main consumers of finances in small businesses are the costs of operation. Even with high revenues, your business is bound to run into debts if the cost of operation remains huge. Take a look at these three ways you can cut down costs:
- Sell off unused items. This may include office supplies and office equipment. If you need them in the future, replace them with leased equipment or buy used equipment.
- Look for resources you can share with other companies on the same floor. For example, you can share internet services.
- Move to a smaller office. A smaller office space means fewer utilities and reduced rent. If things get tough, you can move into a home office.
#3. Increase Your Revenues
After crafting a debt management plan and cutting down operation costs, it’s time to increase your revenues. This you can do using the following tips:
- Get busy on social media: According to BrightLocal, a marketing company, 91 percent of people rely and trust in online reviews, just as they would with personal reviews. With this in mind, it’s crucial to have an online presence, and what better way than to interact with your consumers via social media?
- Reward loyalty: Introduce a loyalty reward if you don’t have one. Customers love to be appreciated, and with a loyalty program, you can retain many customers. Indeed, according to Technology Advice, a tech firm, a whopping 82 percent of consumers said they’d shop again at a store with a loyalty program.
- Raise your prices: You must be careful when implementing new prices, though, especially if you intend on doing it again. However, a classic strategy would be to offer discounts on large orders.
#4. Create a Budget
This may sound like a cliché, but budgets do save a lot of money. Many small business owners skip budget-making, arguing that their business is too small.
With a budget, you’ll have a restriction as to how much you can spend on a product or service. This, over time, instills discipline and will fix the leaking financial pipes. In the long run, budgeting will help you save more money for your future plans.
In the beginning, it might be tedious and overwhelming, but after doing it for a while, you’ll get used to budgeting.
#5. Review Your Payment Terms
In business, you’ll have clients with whom you have a payment plan. It’s no surprise to come across clients who fail to pay on time. Not once but almost all the time. If you experience such irregular payments, then it’s time to review your payment terms.
For a small business, cashflow is important, and with such irregular payments, it’s easy to fall into debt to keep your business afloat.
For instance, if you had an agreement on a 90-day payment plan, cut it down to 30 days. Of course, you’ll encounter some resistance, but again it’s for your own business’s sake. What’s more, you can entice customers with an early payment discount.
For the late payers, impose a penalty to discourage such behavior.
#6. Consider Debt Refinancing
On December 19, 2018, the Federal Reserve revised interest rates upwards. This led to an increase in the variable-rate debt, such as lines of credit and credit card balances.
If you have excellent credit, it would be smart to consider debt refinancing or consolidation. However, don’t do this if you predict a financial crunch that’ll hamper your repayment.
By refinancing, you’ll repay the original loan using a lower interest rate. On the other hand, debts consolidation involves combining multiple loans into a single loan with the help of nation 21 loans. This move allows you to make a single payment with a single interest rate.
You can also refinance or consolidate a business credit card debt by transferring the balance to a 0 %interest card. However, this interest rate is only valid for a certain period. Thus, it’s in your best interest to take advantage of the period to clear your debt.
Salvage the Situation
It’s rare that businesses start debt-free, but you can achieve that status. You know of the overflowing cup, right? After achieving debt-free status, you want to save as much as you can. This will ensure you don’t end up in debts again. Besides, during difficult economic times, you’ll have a well of savings to tap into to get your business going.
Additional tip: during or after paying off your debts, develop a strategic plan to pay cash for any future purchases.
With the steps and tips outlined in this article, you have a great chance of achieving financial freedom in your business.