Small business owners often have to borrow money, to keep the enterprises running. Actually, many small business enterprises start out with debts, right from the outset. Those are the small business enterprises whose startup capital is financed using loans: meaning that, right from the word go, they start out with debts. Then we have the small business enterprises whose start up capital is financed using the owners’ resources, but which soon end up having to borrow money to survive. Thus, one way or the other, debts become part of the small business enterprise’s life.
It is important to mention that small business debt doesn’t always arise as a result of actually borrowing money. We also have businesses that take goods on credit from their suppliers. They therefore end up being owed money in this way…
What ultimately becomes clear is the fact that small businesses have to come up with prudent debt management strategies. It is very easy for a business to fail due to inability to manage debts properly. In this article, I will be examining some of the important things that a small business enterprise owner has to do, when it comes to debt management. I will be dealing with the aspect of keeping track of small business debts. I will be looking at the issue of borrowing prudently and the need to prioritize debt repayment. Finally, I will be dealing with the question of dealing with accumulated small business debts.
Keeping track of small business debts
It is very important for a small business enterprise owner to continually keep track of debts, as they are incurred. This is just a question of keeping proper records. Surprisingly, there are some small business owners who are unable to keep track of their enterprises’ debts. This is how you end up with an enterprise where the owner is simply unable to tell you exactly how much money their business is owed at a given point in time. And this is (subsequently) how small businesses end up under-estimating their indebtedness. They then keep on accumulating debts, and soon end up being unable to repay…
There are computer applications you can use to keep track of your small business debts. The main accounting application you use in your business is bound to have an accounts payable module, which you can use to keep track of the debts. You can also use a more specialized software application, to keep track of the debts: including details such as when the debts are due, what repayment installments are expected and so on.
The most important thing, when it comes to keeping track of small business debts, is to ensure that the debts are logged as soon as possible. This is a question of logging when the debts are incurred, and when the debts are repaid. Then frequent reference should made to whatever system is being used to log the debts. It should be possible for the business owner, at any given point in time, to be able to tell what the business’ indebtedness position is like. All in all, a business should never get to a point where it is unable to keep track of its debts.
On the need to borrow prudently
A small business enterprise should only incur debts when necessary. As a small business owner, there are several important questions you need to ask yourself, before incurring a debt. Firstly, you need to ask yourself the question as to whether it is really necessary to incur the debt. Secondly, you need to ask yourself whether your business enterprise will be in a position to comfortably service the debt.
As a small business enterprise gets well established, numerous credit lines are bound to open up for it. Then, the temptation to (mindlessly) take advantage of these credit lines arises. At this point, as the small business owner, you have to ensure that you don’t give in to the temptation to take advantage of a credit line just because it is available. On the contrary, you should only take advantage of a credit line if you are sure that doing so will be in your business’ best interests.
That is also where the need for you to look at the cost of credit arises. Let’s assume, for instance, that you are thinking of borrowing a certain sum of money and putting it into your business. In that case, you have to ensure that the profit you will be subsequently making will be huge enough to cater for the interest expense, and to still leave you with something at the end of it all.
Prioritizing small business debt repayment
Having incurred debts, it is important to prioritize their repayment. This is to say that a small business enterprise that has debts should endeavor to first repay those debts, before doing anything else with its money. A business that prioritizes debt repayment is likely to end up with a solid credit history. And the solid credit history is, in turn, likely to make the business eligible for even better credit lines in the future.
When I talk of prioritizing debt repayment, I am also dealing with the question of figuring out which debts to repay first. That is, in other words, a question of trying to identify the debts whose repayment is to be prioritized. This will entail looking at the size of the debts, the dates when the debts where incurred, the dates when the dates fall due and the terms under which the debts were incurred.
Dealing with accumulated small business debts
Another important question, when it comes to small business debt management, is the one on how to deal with accumulated debts. Sometimes, and in spite of the owner’s best efforts, a small business ends up with more debts – accumulated debts — than it can comfortably service. Dealing with this situation calls for certain strategies.
One of those strategies may be that of consolidating the debts, so as to end up with a single debt (or just a few debts) that can be easier to deal with.
Another strategy may be that of renegotiating with the creditors, so as to be able to manage the debt situation.
Meanwhile, the business may need to cut its costs and try to rev up its revenues, so as to be able to repay the debts comfortably.
Dealing with accumulated debts is yet another area where the strategy of prioritizing debt repayment may be useful. This would be a question of trying to figure out which business debts to repay first (out of the many that may have accumulated).