Updated 01.06.2021

7 Tips to Manage Your Company’s Debt Effectively

Part of running a business is taking calculated risks. However, there will be times when uncontrollable factors like natural disasters will come and negatively impact your business.

Unexpected events like this can put your business in jeopardy, despite all the preparations you’ve done. Sometimes, taking a loan is all you can do to keep your company running.

You surely don’t want to have a business running at the mercy of a loan. Sooner or later, you have to clear out all your debts so you can get back on your feet and start moving forward again.

So how do you get your business out of debt? Here are the steps you can consider adding to your business debt management plans:

1 – Prioritize paying your debts

Having a strong cash flow is a must for any business. Cash pays for employee salaries, utility bills, and other overhead costs the company have. It’s also used for business debt management to avoid problems that will affect the company’s finances.

If you’re having trouble with your company’s finances, your first order of business should be paying off debts. Forget about expansion, new equipment, promised outings, and other perks for the meantime. Cut unnecessary expenses to free up more cash.

Remember that when you default on your loan, the least you have to worry about is the downgrade in your credit rating. Creditors may seize assets of equivalent value to compensate for the balance you haven’t paid to them. You don’t want this to happen to your business, especially when you’re already backed against the wall.

If you’ve used a company asset as the collateral for your loan, extra effort to prevent creditors from seizing it. Make this your motivation to manage your finances better so that your business wouldn’t have to move a step back, away from progress.

2 – Negotiate repayment terms

Talk to your creditor and see what they can do to your loan contract to make it easier for you to manage. This can be done by either adjusting the interest rates or lengthening the repayment schedule. These two factors can greatly increase your cash flow.

By having a longer repayment time-frame, you’ll be able to pay lower amounts every month. This adds flexibility to your cash flow since debt repayments will now eat only a small portion on your monthly budget. Having more cash on hand gives you more wiggle room during short-term downturns.

Ask your creditor if you can pay only the loan interest for a few months. Request if it’s possible to amortize your business loan.

When applying for a business loan in South Africa, always look for hidden charges, prepayment penalties, and miscellaneous fees that can affect your loan. As part of your business debt management protocol, always read the fine print to catch clauses that may put you in a pinch when things turn sour.

3 – Do a COD or get a deposit from your clients

Have your clients deposit a certain amount of money before you provide them your service. The applicability of this method, though, will depend on the industry you’re in.

Implementing this solution can be challenging especially if you’re dealing with a new client. Most likely, they’ll be hesitant to do a deposit when they don’t have proof of the quality of the products or services you offer. Your marketing team should be able to handle promotional and branding activities that will prove your credibility to new clients.

You can also choose to do transactions on a cash on delivery basis. This is especially helpful to small businesses which have little cash to circulate for its operations. This becomes less feasible, though, as the company grows larger.

4 – Hire a proactive accounting team

Make sure your accounting team is proactive in collecting outstanding invoices from your clients. Bookkeepers should be strict in collecting payments to ensure your cash flow doesn’t fall on a critical level. If clients default on a payment, legal advice should be sought so that both parties can come to an agreement.

You can have the best debt management protocol in South Africa but without enforcers that will observe this process, you’ll still have trouble paying off your debts.

5 – Treat lenders as business partners

When dealing with lenders, think that you have the upper hand and you’re the one that’s asking if they want to be your business partner. Showcase the strengths of your company and tell them what they’ll get in return for doing business with you. This way, you’ll make lenders compete in giving you better loan rates.

This shift in perspective may impress your lender and get you better interest rates for your business loans.

6 – Keep your lender updated

Creditors don’t want to be caught off guard. They run a business just like you do, so you should know how much of a hassle it is when clients can’t pay up on the agreed date.

Keep your lenders in the loop so they know how your finances are doing. If you give them a heads up on potential problems you may face, they may grant leniency on your loans and give you enough room to manage your debts.

Get the number of your banker. Build a relationship with them so you’ll become one of their loyal clients. Who knows? Maybe they’ll prioritize your requests and even help you negotiate with their company during rough times.

7 – Seek counsel from debt management professionals

There will be times when compromising directly with your creditors doesn’t help. When this happens, you can seek counsel from organizations specializing in business credit counselling. They can mediate for your company and advice you on the next steps you can take to manage your debts.

This method works for small business owners in South Africa. However, for larger companies, you may have to get an attorney for legal counselling.

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