A Comprehensive Guide to Business Debt Management

Across all industries, verticals, and markets, debt is unavoidable. The secret to business success isn’t knowing how to avoid debt—it’s knowing how to manage business debt.

What Is Business Debt Management?

In our view, educating yourself on debt management is an essential skill for all business owners, whether they’re running large or small businesses. Business debt management comes down to understanding the challenges of the process and how to control those challenges, while still maintaining business growth.

Some debt will be unavoidable as you invest resources to grow your business, but this can escalate to unmanageable levels quicker than you might think. Arm yourself with knowledge and keep these issues in mind.

Establish a Debt Schedule

Your first step towards managing debt is to take stock of your existing debts with a debt schedule. This document lists out your company’s debts in a structured way, usually including the following details:

• Open loans, leases, and contracts

• Names of creditors

• Current debt balance vs. original amount borrowed

• Interest rates

• Monthly payments

And so on. Get everything on paper before moving forward. This document can be easily created in your accounting software and offers an important reference when considering which loans to repay first and how to structure your other business debt management goals.

Be Mindful of Growth Opportunities

Every small business owner should be aware of opportunities that support growth—but be mindful of where you’re putting your dollars. Poorly thought-out investments can spell doom for your long-term financial situation, even more so when you aren’t prepared with a solid debt management plan.

Strike a balance between what you’re investing in day-to-day operations and your saving strategy. Don’t avoid opportunities, but be aware of how they’ll affect your liquidity. Look for ways to reduce overhead costs and keep your options open for when the right opportunity comes along.

Leverage Loans to Your Advantage

We’ve seen many business owners overlook a common way to reduce debt: loans.

Yes, in a move that may seem to run contrary to common logic, small business loans and establishing a strong line of credit are integral to small business debt management. Credit adds flexibility outside of typical cash flow channels and opens up opportunities for expansion, acquiring favorable interest rates, and more.

Companies can use strategic business loans to invest in opportunities or pay down existing debts, a financing strategy commonly referred to as acquiring “good debt.” (In other words, incurring debt that provides long-term value rather than “bad” debts that reduce value.)

Of course, when leveraging loans like this, make sure that you don’t dig yourself into an even deeper hole. The right financing partner can help you boost liquidity with payment terms that work for your business.

Consolidate Existing Loans to Manage Business Debt

You may notice a recurring theme in our advice: planning ahead and making the right choices from the outset will save you money. But what happens when you’re already in debt? If you’re already struggling to tread water, an easy step is to consider refinancing your existing loans.

Depending on your situation, you may qualify for lower rates than you initially did, or at the very least, you can consolidate your existing loan portfolio into a single payment with a more predictable interest rate.

This type of debt refinancing is a common tactic when dealing with business credit card debt, and it’s an effective way to cut costs in the long term.

Use The Debt Snowball Method To Clear Small Bisiness Debt

The Debt Snowball Method strategy focuses on paying off your debts in order of smallest to largest. As you clear your debts one-by-one, you pick up momentum, move on to the next smallest balance, and repeat until debt-free.

This method is all about paying off your debts one by one, starting with small debts and ending with the largest – irrespective of the interest rate.

Let’s suppose you have the following debts:

• Credit card debt – $5,000
• Bridge loan – $6,600
• Family loans – $7,000
• Trade Credit – $9,000

With the debt snowball method, you would make the minimum payments on all your debts but make an extra payment on your smallest debt (credit card) until it is paid off completely.

If you must pay a minimum of $100 for all of your debts, you would pay an extra $400 (the amount depends on your affordability). This means you’re paying $500 in total on your smallest debt every month. With an outstanding balance of $5,000, your debt will be paid off in 10 monthly payments.

Once your smallest debt is paid off, you can apply that $500 to the minimum payment on the next smallest debt (bridge loan). Since you are already paying $100 on all of your debts, the newly available $500 allows you to pay $600 towards the bridge loan. With an outstanding balance is $6600, it will take almost 11 months to pay off.

You repeat the process, growing your snowball and clearing the smallest debts until they are completely gone. The momentum will help you stay focused until you finally clear your last debt repayment. Just be sure to make the minimum payment on all of your debts along the way in order to avoid the enormous late fees.

One of the largest benefits of the debt snowball method is that you’ll get psychological boost after paying off each debt. Not only will you be removing a recurring expense, you’ll also have more funds available to tackle your remaining debts. While it takes comparatively less time to pay off small debts, you’ll have more funds to allocate to the bigger ones when the time comes.

This keeps you motivated and focused on your goal, whereas tackling debts simultaneously can show minimal progress, ultimately making it easier to lose your attitude.

Another benefit is that you won’t have to pay any extra fees. Debt relief companies typically charge a sizable fee for helping you pay off your debts. Since you’re taking the DIY approach, you can focus strictly on paying off your debts.

Get Proactive About Your Debt Management

At Credibly, we see your business as much more than just a profit and loss sheet—we look at your potential. Don’t settle for loan terms and payment schedules that don’t fit your cash flow, contact us today.