Understanding business debt
For many small business owners, managing debt may have been exasperated recently by the slowing economy. Debt can either be good or bad. In most cases debt is a […]
| For many small business owners, managing debt may have been exasperated recently by the slowing economy. Debt can either be good or bad. In most cases debt is a necessary evil – firstly to kick-start a business into life, secondly to keep the business operating, and thirdly to help it expand and grow. Business debt is good as long as it is not allowed to spiral out of control. However, there are several reasons why a business should not carry high debt levels for too long. Often debt is accompanied by higher interest rates, therefore it will take longer to pay back and in the process eat up valuable cashflow. A debt-heavy business may also find it difficult to reinvest and therefore limit its opportunities for expansion and its ability to purchase capital equipment. Debt can also detract from the quality of an end product or service, as cash is funnelled from productive areas to meet debt repayments. As the owner of your business the high levels of debt may also cause higher levels of stress, affecting both your personal life and the business decisions you make. So what can you do to protect yourself from bad debt? Here’re five steps you can take: 1. Look at how your debt is structured and what it is secured against. Try and consolidate your debt and secure this against an asset – for example, your property. This way you have the ability to finance your debt over a much longer period of time and at a lower interest rate. You should also remember that the good thing about business debt is that it is tax deductible, so it is often a good idea to pay off as much personal or non-deductible debt as you can and then examine whether you may be able to just pay interest only on your business debt. This has the additional benefit of giving you access to more equity which you can use to secure your business. Any debt restructuring should always be discussed with your accountant. Always talk to your accountant before making any refinancing decisions. 2. Reassess your lifestyle and make it a rule not to dip into the business to fund your personal life. Ask yourself, is now the time to be going on an extended holiday? Do you need a second vehicle? There may also be expenses that your business can legitimately pay and claim for tax deductible purposes, but aren’t really necessary to the running of the business. Quite often business owners get into the mentality of spending a dollar to save 30 cents. When cashflow is tight it is best not to spend the dollar to start with. 3. See where your business can cut costs and use these savings to make debt repayments. If you choose this strategy you need to be extremely careful not to cut costs that will comprise the quality of your service or product. 4. Review your business’s overall structure with your accountant. The structure you choose can often impact the amount of tax you pay and your ability to defer tax while you repay debt. In the event your worst fears are realised, and a debt provider takes action against you, your business’s structure will play a vital role in protecting your personal assets. |
5. Anticipate your future cashflow needs. This should be done in some form of cashflow forecast which is regularly updated. Banks now require more information to approve or renew finance facilities – in particular, they insist on seeing several cashflow forecasts. In my experience the preparation of a forecast serves not only to provide the bank with the information it requires; it also gives the business owner valuable insight into their business’s requirements, encouraging them to review their strategies to improve cashflow and profitability. A forecast can also be used to monitor your performance on a monthly basis. |
The truth about Trusts
Making your customers feel they are missing out
