Debt can be your friend to help your business to reach another level and debt could be your enemy which can destroy your business. It depends on how you are using it. If you are using the debt for purposes of inventory because all of your products got sold then it counts as good debt here is clear that your product has a demand on the market so you will recover the debt in less time.
But when you borrow debt to launch a new product then this count as bad debt because it is not clear whether your product will bost in the market or not. Some small business owners are fallen into debt and don't know how they get rid of bad debt.
So, In this article, we will discuss 7 steps on how can small businesses get out of debt in 2023.
1. Track your Cash Flow
You have to track your cash flow which will tell you how much cash is in and out of your business. In the second step, analyze where you spend most of the cash and see whether it is necessary to spend cash there or not. If not then spend that unnecessary cash on the operation which is performing well or helps to gain revenue.
Eg - if you spend $1k per product creation and your products are selling less but have a good customer review then, in this case, you can spend some product creation money on marketing. It will generate a boost in your business.
2. Debt with interest rates
Identify the total amount of debt you have with the interest rate on your business whether it is a credit card loan, Term Loan (Short & Long-term Loan), Working Capital Loan, or another. After identification gives priority to the debt which contains high-interest rates and pays that debt first.
Why pay a high-interest rate debt first?
Cash save on interest - Paying high-interest rate debt first helps to save interest. If we pay it later and pay low-interest rates first then in this case interest rate will become high until we reach to pay high-interest rate debt.
there is a popular method to pay all of your debt which is called the debt avalanche method. in this method, people make a minimum amount of payment on their loans but put a high amount of cash toward their high-interest-rate debt. When that debt is paid off they pay another high-interest debt until they become free from debt.
3. Increase revenue
By increasing your revenue, you can pay your debt fast and in less time. You can increase your revenue by an increase in your product price point. If you have a product or service adding value to your customers and there are no similar products available in the market like yours. Then, you can increase your product price. It has a disadvantage it will away some customers. But most customers will pay for it and in the end, the business will be profitable.
4. Avoid delayed payment from customers
Decrease your payment terms, if you allow customers to pay for products or services in 70 days decrease it to 40 or 50 days for ahead purchases. This will help you get cash in less time and you will be able to pay your pending debt.
Check outstanding invoices records and call your customers to remind them about previous bills. If they do not attend your call. Try another method to reach out to them. Through messaging them by email, through a letter, etc.
5. Cut out costs
Virtual technology - after, the covid - 19 pandemic the whole world is shifting towards the Internet. You can take benefit of this by attending meetings on a social platform. Such as - zoom, Google meet, and Webex. These meetings will help you to save money on travel expenses and virtual space.
Read also - 8 ways on How small businesses can reduce costs and increase revenue or profit in 2023
6. Negotiate
You can negotiate with your creditors for lower interest rates, and extend a payment plan. You can do this by showing your business situation and other factors By which you are unable to pay the debt. Then there is a chance your creditor will lower the interest rate and extend a payment plan. Because your business loss contains creditor loss.
7. Friends and family
These are the persons who know you better than your creditor. You can ask them for money. In most cases, you will receive money from them and maybe they charge less on zero interest if you have a good relationship with them or if they trust you.
Related Searches:
1. how does debt affect cash flow?
When you borrow a loan it counts as positive cash flow because the flow of cash is in an inward direction and when you pay a loan it counts as negative cash flow because the flow of cash is in an outward direction. If the loan is less and contains less interest rate then whenever you repay the loan the outflow of cash is fewer. But when you borrow a big amount of loan with a large interest rate. Then cash outflow is more.
Read also - Cash flow, it's head? importance of cash flow in small businesses
2. what happens when a company has too much debt?
There are several bad effects when a company or business has too much debt
Some of them are :
Company growth - any company if it is big or small borrows debt for the company's growth. But when the company doesn't hit the target then It put a bad impact on the company's finance. Because In this condition, the company has to recover losses and also pay the debts.
Limit to borrow debt - banks or lenders conduct underwriting and evaluate reports of credit card and debt-to-income ratio which is the total monthly debt to total monthly income.
So, if a company has too much debt and needs to borrow more debt. Then the lender may lend to the company but charge high-interest rates.
3. What is an acceptable cash flow to debt ratio
There is no specific answer to the question it varies from industry to industry. But, in general, 1.0 to 2.0 consider a health ratio, and above 2.0 consider a good ratio. This shows the business has enough operating cash to pay all of its debt.
4. How debt affects free cash flow
the amount of cash left in a business after paying outflows such as payroll, and taxes, and the business use that cash according to its wish is known as free cash flow. When a business has a high amount of debt then outflows are more in debt and interest rate and because of this less or no free cash is available in the business.
5. how much debt is ok for a small business
A small business should aim to keep its debt-to-equity ratio below 1.5 which is the ratio of total debt to shareholders' equity, meaning that the amount of debt should not exceed 1.5 times the amount of equity.
6. How does debt affect the three cash flow statements?
When debt is low with low-interest rates it has a minor disadvantage which a company can pay by putting in some effort.
But, when debt is high with high-interest rates it has a major disadvantage that affects all 3 cash flow statements.
1. Investing Activity
when debt is high a company can not buy land, or equipment because it has to spend most of its cash on Paying debt.
2. Operating Activity
when a company has too much debt it can not spend on day to day to operations such as marketing, sales, hiring, etc.
3. Financing activity
when a company needs to borrow debt but, it has already in debt then, in this case, the lender may pay a company's loan but he/she will charge a high-interest rate.
