Almost all small business owners acquire debt at some point. In fact, the average amount of debt hovers around $195,000.
For most businesses, you acquire that business debt early. It helps buy equipment, bring on employees, and carry the business until you become profitable.
Once you acquire that debt, the question becomes how best to manage it. Where should you focus your debt reduction?
If you’re wondering how you should manage your business debt, keep reading for a quick guide.
Managing Business Loans
One of the most common types of business debt is the business loan. Some people acquire business loans directly from a local bank. Others seek loans through the small business administration.
In most cases, business loans come with a fixed repayment period, fixed payment amounts, and fixed interest rates. Since payments and terms remain stable, making the monthly payment is typically the best strategy. The only exception to this is if you get an opportunity to refinance the loan for much better terms.
You can pay loans off early but watch out for prepayment penalties.
If you’re considering a PPP loan, check out this post for some important information.
Managing Credit Card Debt
Freelancers, consultants, and bootstrap solopreneurs often lean on credit cards in the early days. Credit cards offer a quick way for you to acquire essential equipment or rent office space. Of course, this form of business debt comes with a serious pitfall.
Credit cards come with much higher interest rates than most traditional business loans. Business loans typically come with a single-digit APR, while credit cards might impose a 20% or higher APR. Given these higher rates, you should prioritize paying this debt down.
Paying it down reduces the total interest you pay and frees up that credit for potential future needs.
Reducing costs plays a key role in how most businesses manage business debt. Cutting costs frees up money for debt reduction. There are several strategies you can use for reducing costs.
You can downsize your working space when your lease runs out. You can also look for debt consolidation options, such as loan or credit card consolidation.
Look at all the services your business uses. Do you need them all? Can you move to cheaper alternatives?
Get in touch with your vendors. They may offer you discounts if you ask. If they are reluctant to do so, and you are out of stock or in need of more products you can opt for a short-term financing solution like purchase order financing.
It’s not fun, but you may find it necessary to let some employees go. Just make sure you can actually survive without those employees.
Managing Your Business Debt
Each business has a different debt profile. That means you must take a hard look at your own business debt before adopting a debt management strategy.
If most of your debt is a loan, then refinancing may prove the only real option for adjusting those payments. Credit card debt or other lines of credit typically benefit from an aggressive pay down approach.
Also, cutting costs can free up money for debt reduction or provide extra working capital.
Looking for some more business finance tips? Check out the articles in our Business section on this site.