Understanding Small Business Debt
Small business debt is any money that a business borrows or owes to others. This can include loans, lines of credit, credit cards, or other types of financing. While debt can be a valuable tool for growing a business, too much debt can be detrimental, leading to high payments and financial stress. In this blog post, we’ll explore some strategies for managing small business debt as well as ways to use debt to expand a business.
Tips for Managing Small Business Debt
Create a budget
One of the most important steps in managing small business debt is creating a budget. This will help you understand your business’s cash flow and identify areas where you can cut costs. Look for areas where you can cut costs, such as optimizing your advertising activities or renegotiating your rent. By creating a realistic budget and sticking to it, you can better manage your debt and avoid overspending.
Prioritize high-interest debt
If you have multiple types of debt, it’s important to prioritize paying off the debt with the highest interest rate first. This will help you save money in the long run and reduce your overall debt burden. Once the high-interest debt is paid off, move on to the next highest interest rate and repeat the process. By prioritizing high-interest debt, you can reduce your overall interest payments and pay off your debt more quickly.
Interest is one of the most challenging hurdles to overcome when managing business debt. Loan consolidation is a proactive way to handle interest. Rather than paying multiple loans with high interest rates, sometimes it is possible to refinance your debt under one loan for a lower rate. Loan refinancing opens the opportunity to lower your monthly payment and interest rate. Products like Small Business Administration (SBA) Loans provide access to capital you need to handle expenses.
Ways to Reduce Costs
In addition to creating a budget and prioritizing debt, reducing your costs is another key strategy for managing small business debt. By lowering your expenses, you can free up more cash flow to put towards your debt payments. Here are some tips for cutting costs:
Eliminate unnecessary expenses
Take a close look at your business expenses and identify those that are unnecessary or could be reduced. Small savings add up over time.
Find new suppliers
Don’t be afraid to shop around for new suppliers who offer better rates or more favorable payment terms. Take advantage of discounts on accelerated payment schedules if your cash flow allows. You may be able to find a supplier who can offer the same quality products or services at a lower cost. Take the time to research different options and compare prices to find the best deal.
Implement cost-saving measures
There are many ways to reduce your business expenses, from using energy-efficient appliances to encouraging employees to work from home. Analyze your operations and cut low-performing products or services. Look for cost-saving measures that make sense for your business and can help you save money in the long run.
Using Debt to Help your Business Grow
Debt isn’t always a bad thing; it can also be a useful tool for helping a business grow. Using debt smartly requires a clear plan, an understanding of the finances involved, and a commitment to follow through in order for it to be successful.
There are a number of valid reasons for a business to take on debt. A few of those reasons include to:
- Retain equity in the business and not have to take on a partner.
- Reduce government taxes.
- Build credit history.
- Hire additional employees.
- Purchase facilities or equipment.
Before taking on additional debt, ask yourself the following questions: How much do you need to borrow to accomplish your goals? What is the total cost of financing over the term of the loan? What type of return can you expect from the activities you are financing? The answers to these questions will help you find the break-even point to determine if the return is worth it.
When deciding whether business debt is right for your unique situation, it is imperative that you do your due diligence to determine if the advantages outweigh the disadvantages and proceed accordingly.
Manage your Small Business’s Debt with Mid Penn Bank
Mid Penn Bank offers various financial tools and resources for small businesses in Central Pennsylvania. Our business loans, credit lines, business checking accounts, and digital banking tools help companies across industries implement proactive debt management practices. Please contact us to see how our financial expertise can help you, and support your debt management plan.
The material on this site was created for educational purposes. It is not intended to be and should not be treated as legal, tax, investment, accounting, or other professional advice.
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