All businesses have to borrow at some stage to fund growth. Debt in your balance sheet is not an unusual item. However, it is not a comforting factor in your financial health. India has seen several large scale debt related defaults by large corporate’s. This begs the question-How to reduce debt? Debt Management is the answer.
Here’s a step-by-step plan to help you reduce your business debt, so you can reclaim your sanity and start focusing on other important tasks.
Start with a Budget
We can’t emphasize how important it is to have a budget. In fact, we have written a whole blog about this. A budget is the best way to set target for revenues and limits for costs. Measuring these targets with actual revenues and costs will give you a good idea where you stand as a business. A business owner will actually be able to determine how much he can borrow and how long it will take to repay the loans.
Make a repayment plan
EMI’s for debt repayment are known to very borrower right from the start. So for a business, it is all about having money to fund the repayment schedule. One of the key aspects of this plan is cash flow management. A business needs to have enough cash for EMI payments. There are two thumb rules a business can use to save cash:
- Control spending: spend only on essentials. This is a tough plan which requires a lot of discipline.
- Earmark cash for repayment: set aside a % of your sales or profits each month to pay EMI’s
Set an “Exit Date” for Debt
This is a part of the “Repayment Goals”. Marking out a date in your calendar to be debt free will keep your motivation levels up. The lenders too would have specified a repayment schedule and pre-closures are not penalized anymore by lenders.
Negotiate Terms with Vendors
It is simple, ask for more credit. Most successful retail companies let vendor manage their working capital for them by asking for discounts or more credits. This will help you streamline your cash flows as well.
Avail the right debt product
Identify the debt product which works best for your business. If working capital is what you are looking for then consider availing cash credits, overdraft or a working capital term loan. However, if you want to fund an asset purchase then avail a term loan. The security for the loan depends on the type of loan for e.g, for an asset purchase a mortgage on the asset will be security. However, an overdraft or a cash credit will be secured with stock or receivables of the business.The interest rates for these debt facilities vary as well. Choose an option that suits you best.
Renegotiate the terms of loans
What if you are not able to pay EMI’s? Don’t panic. You always have the option of renegotiating your loans. This requires the lender to recast the repayment schedule or include a moratorium period. Additionally, you can ask for a funding of interest via a funded interest term loan. This is easier said than done as it takes an excellent track record of the borrower to renegotiate.
Keep an eye on margins
Interest payments have a huge impact on margins. It is important to minimize the hit of interest on margins. As a business change your product or service mix to reduce low margin offerings.
Leasing equipment’s often works out cheaper than owning them. Leasing will help reduce huge upfront payments for equipment’s.
It’s perfectly normal to be worried about repaying loans. The best way of getting rid of this stress is to pick debt management/reduction ideas, commit to a plan and make it happen.