Debt is a useful and necessary tool
in business. If managed properly, it can be your biggest asset. If you’re a small business in debt, hopefully your business is growing and you’re able to manage that debt. Many are struggling with debt
According to the Experian Business Debt Index (BDI), South African business debt improved a little during the first quarter of 2016, but the economy isn’t out of the woods yet
. The ratio of debts overdue by 90 days is increasing and is at the highest ratio since the 2009 financial recession.
As interest rates continue to rise and the economy experiences slow growth, more small businesses are struggling to pay their debt. Despite this fact, the economy isn’t showing signs of collapse because businesses are building up their cash reserves rather than spending their money on capital projects.
If you happen to be struggling with debt and trying to break even, the first thing you need to understand is the different options you have for resolving your debts. Understanding debt management
Sometimes it makes sense to consolidate or attempt to settle your debt with a creditor, and sometimes it doesn’t. When you’re a small business, unless your head is underwater and you’ve got an impossible amount of debt to pay off from multiple creditors, you’ll want to aim for managing your debt.
Managing your debt means working with a company that helps you formulate a plan that allows you to repay all of your debts with a single monthly payment. The money is paid to the company and they distribute the payments on your behalf. The only caution with debt management programs is that if you miss a payment, your creditors could cancel the agreement and you’ll be right back where you started. Debt settlements and consolidations
Managing your debt helps you create a predictable outcome while a debt settlement agreement is a gamble
. If you attempt to settle your debts, should a few of your creditors not be willing, you could find yourself in a situation that is even worse than when you started trying to get settlement agreements.
When a creditor learns that you’re trying to either settle or consolidate, they know that means getting less money. Some creditors may move straight to suing you for the debt, thinking they’ll get more of their money that way.
So which option is right for you? It all depends on your individual circumstances. If you’ve gone into debt in order to build your business and are struggling to find ways to reduce your debt and finally reach the point of making a true profit, here are some tips to help you. 1. Go back to the basics – start with a reality check
Managing your inventory and sales is a foundational aspect of managing your debt because if you don’t know what kind of a profit you’re making, you won’t know if you’re going deeper into debt.
The first thing you need to do is get a handle on your cost of goods, your profits, and your expenses. You may be hesitant to calculate out the specifics if you think you’re not making a profit, but it’s the only way to know what’s going on.
If you’re pouring more money into your business than your profits can cover, you need to know as soon as possible. 2. Settle your debts
If the amount of debt you owe is too large for you to make regular monthly payments, or your employment situation isn’t stable enough to guarantee you can meet the payments with a debt management plan, you’ll want to consider working out a settlement for your debts.
When you negotiate a debt settlement with a creditor, they’ll usually offer you the option to pay your debt in one lump sum at a discount of up to 50 percent. Or, they’ll offer you the ability to make regular monthly payments at a lower discount, say 30 percent. The more you can pay in one sum, the bigger the discount.
The disadvantages of settling your debt is that it remains on your credit report and sometimes shows up as a settlement which tells future lenders you might be a risk. 3. Consolidate your debt
Consolidating your debt is similar to settling your debt, except you’re going to be paying a company to negotiate deals with all of your creditors on your behalf, and you’ll pay that company either a lump sum or a monthly amount that includes a service fee. If you have several creditors to keep track of, this can significantly reduce your stress. Negotiate and communicate
If you’re going to make payments to your creditors, it just makes sense to negotiate wherever possible. You can negotiate better interest rates
, better payment terms, amortisation schedules, and even the hidden terms that are buried in the fine print.
If you’re unable to make monthly payments to a third party, don’t be afraid to call your creditors and discuss your options with them. If you’re honest with them and explain your financial situation in a way that doesn’t come off as an excuse, they’ll probably be willing to work with you.