- Borrowing strategically and managing debt effectively may help small business owners sustain operations, build credit, maintain cash flow, and fuel business growth while minimizing risks.
- Enhancing cash flow through better receivables management, controlled expenditures, and building an emergency fund may ease the burden of repayments and minimize reliance on additional borrowing.
- Maintaining a detailed inventory of all debts, including their amounts, interest rates, and due dates, allows for informed decision-making.
Debt can be a valuable tool for expanding a business but may also become a liability if it gets out of hand. So, how can you borrow and repay strategically to support business growth without jeopardizing your financial health? Let's explore seven debt management strategies to help you fuel growth.
What is Debt Management?
Debt management involves borrowing, using, and repaying debt to optimize financial health while minimizing risks. An effective strategy helps small business owners sustain operations, build business credit, drive growth, and maintain a healthy cash flow.
7 Debt Management Strategies for Small Businesses
Effective debt management helps you maintain a healthy balance sheet and build financial stability for long-term growth. Follow these strategies to help you prioritize repayments and reduce interest costs:
1. Organize Your Debt
Take inventory of all your business debts, including business loans, credit lines, credit card balances, and outstanding invoices. Calculate the total debt amount and compare it with your revenue and profit to gain a high-level view of your financial health. Then, create a comprehensive list of all your outstanding debts detailing the loan amounts, interest rates, monthly payments, due dates, and remaining balances. Here's an example:
| Debt Type | Lender | Balance | Interest Rate | Monthly Payment | Due Date |
|---|---|---|---|---|---|
| Business Loan | Local Bank | $50,000 | 8% | $800 | 1st |
| Equipment Lease | ABC Leasing Co. | $20,000 | 5% | $500 | 15th |
| Credit Card | Business Card | $10,000 | 18% | $300 | 20th |
2. Prioritize Debt Payments
Prioritize your debts based on interest rate, impact on your operations, urgency, and other relevant factors. High-interest debts, such as credit cards or short-term loans, are one of the primary barriers to paying off debts. Addressing them first helps minimize the total interest you pay over time, thereby reducing the cost of borrowing. For example, you may assign credit card debt with an 18% interest rate a high priority and an equipment lease with a 5% interest rate a low priority.
3. Establish a Repayment Strategy
The Avalanche method involves paying off debts with the highest interest rate first while making minimum payments on others. For example, you may pay extra toward the credit card debt with an 18% interest first, then move to the business loan with an 8% rate. Meanwhile, the Snowball method involves paying off the smallest debts first to build momentum. For example, you may pay off the $10,000 credit card debt before tackling the $20,000 equipment lease.
4. Improve Cash Flow Management
Ease the burden of debt repayments and improve cash flow by optimizing your receivables and controlling expenditures. Maintain a cash reserve (i.e., an emergency fund) for unexpected expenses to avoid additional borrowing that may hurt your financial health. Also, follow treasury management best practices like improving liquidity management, optimizing financial structure, and enhancing fraud risk management to improve your outflows, inflows, and overall cash utilization.
5. Consolidate Debts When Appropriate
You may reduce the interest you pay by consolidating multiple loans into one with a lower interest rate. For example, you may work with a lender offering debt consolidation services to turn three debts with interest rates at 18%, 10%, and 8% into a consolidated loan at 7% to reduce monthly payments and lower the cost of borrowing. Moreover, debt consolidation simplifies repayment and financial management to save you time and headaches.
6. Renegotiate Terms with Lenders
Contact your creditors and negotiate better terms, such as lower interest rates or extended repayment periods. Many lenders are open to adjustments if you show good faith and present a realistic repayment plan. When approaching a lender, clearly explain why you request the change and back it up with financial documents. Be honest about your financial situation and remain professional — a cooperative tone fosters goodwill and increases the likelihood of favorable terms.
7. Review Your Plan Regularly
Debt management isn’t a one-time task. Regularly review your borrowing strategy and debt management plan to ensure it remains effective and adapts to your business's trajectory. For example, you should only take on debts when they directly contribute to your company's growth or operational efficiency. Avoid borrowing for discretionary expenses or projects without a clear return on investment (ROI). Also, understand your debt capacity to borrow within your capability.
Fuel Your Business Growth with Smart Borrowing
Borrowing strategically and having a sound repayment plan allow you to get the resources you need to grow your business without jeopardizing its financial health. Your PNC business banker works with you to understand your objective and help you find the right financing option to support your vision. Schedule an appointment to see how we can help.
