Many small business owners take on debt to fund and grow their businesses. But sometimes, in the hustle and bustle of making sure you’re offering reliable service to your clients or creating the best products for your customers, you can start to feel like you’re losing control over your financial obligations.
If you’re struggling to make your debt payments or you’re simply looking for better debt management methods, there are strategies that can help. For example, you could try using a low-interest business credit card with flexible spending power, no annual fee and an online budgeting tool to help track your cash flow, which may help you stay on top of your debt more easily, while paying less in interest.
Let’s look at some more ideas for handling your debt—and keeping your head above water.
Get clear on your finances
The first step in managing your debt as a small business is to make sure you have a handle on your finances as a whole. Take some time to ask yourself the following questions: How much money do you have coming into the business? Where is your money going every month, including vendors, suppliers and one-off costs? How much money do you owe, and who do you owe it to?
If you have a very small business that doesn’t use sophisticated accounting software, it can help to track your debt on a spreadsheet. Include the name of each lender, your total balance, how much you owe every month with interest and the due date. Seeing this information written down could help you start to feel more organized as you figure out how to prioritize your repayments.
Create a budget
As a follow-up step, create a monthly budget for your business or update your old one. You may need to make changes or cut back on expenses if your costs are too high or your revenue isn’t where you need it to be. Identify which costs you could cut entirely, which ones you could cut back on and which ones you could negotiate with your vendor or supplier.
Your budget could also help you understand exactly what you could afford to spend on monthly debt payments if you decide to consolidate your loans or negotiate with your lenders.
Choose a payoff method
When it comes to paying off your debt, there are two popular strategies: the debt avalanche and the debt snowball. These strategies could help if you’re managing multiple different loans or credit cards and don’t know where to start. Here’s how these methods work:
- Debt avalanche: Put any extra funds toward paying down the debt with the highest interest rate first, which could save you money in the long run. Once you’ve paid off the first debt, put extra money toward the debt with the next highest interest rate.
- Debt snowball: Put any extra funds toward paying down the loan with the smallest balance first, which could give you some momentum and positive feedback. Once the smallest loan is paid off, put extra money toward the loan with the next smallest balance.
No matter which strategy you choose, it’s important to stay current on all your debt payments until they’re paid off. Remember that you’re paying more toward each targeted debt, not just reallocating funds from one debt payment to another.
Negotiate with your lenders
If you’ve had an emergency or are going through a rough patch, see if your lenders or creditors may be open to negotiating your interest rate or extending your next due date. Explaining your situation and being clear about how you’re trying to manage your debt payments could go a long way, especially if you communicate with them sooner rather than later. You could use the budget you created earlier to figure out exactly how much you can afford to pay on your loans each month.
Consolidate your loans
If you have several high-interest credit cards or loans, it may be worthwhile to consolidate your debt by taking out a new loan to pay them off all at once. The new loan will ideally have a lower interest rate than your previous loans, which may save you money on borrowing costs, and you’ll only have to keep track of one loan payment each month. If you negotiate a longer loan term, you might find your monthly payment amount is lower, too.
It’s important to note that you can’t consolidate all loans. High-interest credit cards and unsecured loans are the most common candidates for consolidation.
Look for small business support
Don’t be afraid to seek out professional help if you need it. Research debt management support in your community or reach out to other small business owners for advice. In Canada, nonprofit credit counsellors can contact your creditors to negotiate on your behalf and help you create a debt management plan that consolidates your small business debt into more affordable monthly payments.
Take steps to manage your debt
Taking on a certain amount of debt as a small business is beneficial because it can help you build credit, but learning how to manage debt responsibly can be challenging. Commit to a debt payoff strategy that works for you, reach out for support when needed and keep your company’s financial health top of mind as you grow your business.
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