While it is great to take on debt to put your business on the fast track to growth and profitability, repaying them on time can become a big issue if due to any reason there is a downturn affecting the fortunes of the business. Often, in desperation, entrepreneurs take on more debt to repay the debt taken earlier, and end up in a debt trap that can be very difficult to get out of. Some practical ways of managing debt so that you don’t end up having to liquidate your business:
The Snowball Technique
This method involves your making a list of all your debts and paying off the smaller ones first. Pay off the smallest loan and then move on to the next one. With each individual debt being settled, the amount that you have available to pay off the debt that is next on the list becomes larger, hence the name ‘snowball’. This method also has the effect of boosting your confidence with the knowledge that your list of creditors is progressively getting shorter. It is important, however, not to forget to pay the minimum monthly amounts on the other debts.
The Stack Method
This method involves paying off the debt carrying the highest rates of interest and then moving down the list. This is the best way of saving on the interest outgo though the process can be long and frustrating. While remembering to make the minimum dues required on other debts, you can accelerate the process by plowing in extra savings to the loan repayment process.
Often when you take on debt from multiple sources, you can have a problem not only in making the monthly payments but also keeping track of all the debts. It is wise to take a consolidating loan that leaves you with a single loan of an amount that is the aggregate of all the individual debts. You are also very likely to be able to get the benefit of a lower rate of interest that will save you a lot of money and boost your debt relief efforts. The loan consolidating agency will take on the responsibility of paying off your earlier debts.
You may also make the monthly payable amount more affordable by extending the term of the new loan; however, keep in mind that you will end up paying more interest over the total period. To be able to get really low rates of interest, you will need to have good credit. Putting up the business or personal assets as collateral can put you at risk of losing them in case you default.
While the methods described above are effective for managing accumulated debt, you will not be able to really generate profits unless you engage in cost-cutting. This may involve examining all expenditure, downsizing, new marketing initiatives and even selling assets that are not required. Unless you do this, sooner or later, the financial health of the business will again become critical and you have to apply for bankruptcy.
Author Bio: Evans Connor is a financial consultant working with a reputed debt relief agency. Evans is a prolific blogger on business debt issues and their resolution.