So you’ve decided that a loan is the best option to give your small business a much-needed cash injection. Standing under a debt cloud isn’t inherently bad or dangerous – in fact, if you manage the debt effectively, sometimes it can be the best way to light a fire under your business.
1. Keep Tabs on Your Credit Score
Having a healthy credit score puts you in a better position to negotiate your debts with your financier. A higher credit rating means you could work out a deal that allows you to pay off the loan faster or reduce the minimum repayments.
You can review your credit score in a variety of ways, such as through credit reporting agency Veda, but it’s important to consider the things that can affect this, including:
- Payment history, particularly your payment timeliness
- The amount you borrow compared to the amount of available credit
- The length of credit history – it’s beneficial to keep credit accounts open and untouched as opposed to closing them
- The number of applications for credit
- The types of debt you have
2. Avoid New Debt
Most debt management boils down to financial discipline and never taking on more debt than you can realistically afford. If you find yourself running into trouble with repayments, your first port of call should be cutting back costs or looking for ways to increase sales.
The next option is to consolidate your loans. One way to achieve this is to transfer your company’s credit card debt to a 0% interest account, which gives you a hassle-free way to pay it off. Another is to consolidate a high-interest rate loan onto a secured loan, such as your mortgage.
Before taking on any new debt, always discuss your options with your financial institution to see what’s available for your business.
3. Pay More When You Can
Seasonality affects many industries and it’s likely that your business is the same. If you have a busy period where sales are up, you could pay down your debt with more than the minimum repayments. Another option is to put the extra money into an emergency fund for when times are lean, so you don’t miss any repayments. It really depends on how much debt you have and what your ultimate goal is. If it’s to be debt-free then attacking the debt while you can seems prudent. The best defence is a good offence.
It’s also a good idea to shop around for a loan when times are good. When you’re making money, have a good credit score and can prove it, you’re a lender’s dream. As a result, another institution might take on your loan at a more competitive interest rate.
4. Investigate Government Assistance
The Federal Government encourages small business owners with a variety of grants and resources to help them succeed. The Australian Small Business Advisory Services, for example, provides low-cost information services. It might be worthwhile getting in touch for advice about your debt situation and how you could get out from under the debt cloud.
Another government initiative is the Entrepreneurs’ Programme, which aims to make small business more competitive and productive. Some of these business grants are worth up to $1 million, and it isn’t overly cumbersome to apply for them.
5. Communicate With Your Lender
Remember, banks have hearts too – well sort of – and they do consider extenuating circumstances that might make meeting your financial obligations more difficult. If you forecast financial hardship, or things take a sudden turn for the worse, it’s important to open lines of communication with your financial institution before you miss a payment.
Banks will consider your circumstances and tailor a solution to your situation, which could mean:
- An extension of the loan term
- A short-term repayment reduction below the current minimum
- An interest rate reduction
- A short-term delay of payments
- A debt settlement
With the right management of your debt you can be assured you’ll pay it off sooner rather than later, particularly if you can capitalise on business spikes. If you have questions related to your industry or your business circumstances, you should consult with your own professional tax advisor, accountant, attorney, industry expert or professional association.