Business debt – money owed by your business to a third party – can be difficult to deal with. While debt isn’t a dirty word, it can be relatively easy for the situation to spiral out of your control. That’s why it’s important to have a debt reduction action plan to help shred your debt and keep your business’s financial health intact. Find out more about debt reduction, including cash flow vs. debt reduction and debt reduction strategies for small business.
Why is a debt reduction plan important?
Debt isn’t always a bad thing – in fact, sometimes it can be a tool for growth. But while taking on the right amount of debt at the right time can give your business the shot in the arm it needs to thrive, it’s not uncommon for businesses to overextend themselves and take on debt obligations they don’t have the ability to repay. If you’re dealing with business debt that’s threatening to sink your business, a debt reduction plan can help you take the necessary steps.
Cash flow vs. debt reduction
Although debt reduction is important, it may not be a great idea to focus on your company’s debt reduction action plan to the detriment of cash flow. If you don’t have the luxury of large cash reserves, next month’s bills are more important than paying down the debt. On the other hand, if the debt you’re dealing with is manageable and you have a significant cash surplus, it may be a better idea to use surplus cash to pay off the debt as quickly as possible, rather than continuing to pay interest.
Put simply, when it comes to cash flow vs. debt reduction, it’s not an either/or situation. Cash flow should be a significant element of your strategy from the very beginning. Improving cash flow can help boost working capital, giving you the ability to pay off your debt obligations in a timely fashion.
Debt reduction action plan: 5 tips to reduce small business debt
Putting your business back in the black is no small feat, but there are many different debt reduction strategies that can help you effectively and methodically pay back your business debt.
1. Reassess your budget
It’s important to have a good understanding of your company’s financial health before you begin to tackle the debt. First, investigate your current numbers and identify your total debt, your current cash flow, and the amount of money you’re able to allocate each month to pay off your debt. That’s the foundation from which your debt reduction action plan should be built upon.
2. Decide upon a debt reduction strategy
Generally speaking, there are two different approaches to debt reduction. First, there’s the spartan approach, wherein you only spend money on essentials until the debt is fully paid off. Then, there’s the percentage approach, wherein you set aside a percentage of your profit to pay off the debt. The most appropriate debt reduction plan for your business will depend upon your cash flow and the amount you owe.
3. Reduce your expenses
Once you know how much debt you're dealing with, it’s important to take stock of your company’s operating costs. Which expenditures are necessary, and which can you do without? Are there subscriptions you don’t use anymore? Could you renegotiate prices with certain vendors? Look at your financial statements to determine your biggest expenses and try to reduce or eliminate them.
4. Keep communicating with creditors
Solutions to your debt problems could be found by communicating with your lenders. For example, it may be possible to negotiate lower interest rates, particularly if you’ve been making regular payments and your business is in good health. Furthermore, you may be able to consolidate all your loans into one monthly payment, helping to ease your repayment load.
5. Create a “get out of debt” timeline
After you’ve reevaluated your financials, reduced expenses, communicated with creditors, and settled on a debt reduction plan, you should be able to set a date for when you’ll be able to repay the debt in full. It’s also a great idea to mark out milestones along the way to keep you motivated and measure the effectiveness of your business’s debt reduction action plan.
We can help
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