Navigating the finances of a business and balancing between credit and debt can be a challenging task. For many businesses, debt is a crucial tool, one that helps ensure that the company runs optimally.
Naturally, loans for business are the go-to options, and you can avail IIFL Business Loan, Bajaj Finance Business Loan, etc. at competitive interest rates to keep the cost of borrowing low.
However, you must have a repayment strategy in place, and ensure that it works to safeguard your business’ financial stability. Mismanaged debt is a major issue for businesses, and you should do all you can to steer clear of such problems.
So, read on to know how to create an effective strategy to manage debt to keep your business’ finances healthy.
How to Manage Your Debt and Strategise Business Loan Repayment
Repayment is a crucial part of this undertaking, and there are ways for business owners to optimise this process. This is important because failing to repay your loan has consequences.
For one, you attract penalties, which only grow the longer the loan remains unpaid. Secondly, it may lead to a loss of assets, if you have availed of a secured loan. To avoid all these issues, here are certain strategies that can help.
Organise and Prioritise Debt
One of the most important components of debt management is understanding the debt obligation of the business. Tracking liabilities properly is key, and not all businesses do it well. This leads to costly errors, especially if there are several credit accounts.
In such cases, all accounts will have different rates of interest and hence, different amounts of EMIs that you will need to pay. Organise the details of these loans and get a clear idea of what the company owes.
Now, you can prioritise repayment of the loan for business. At this stage, you can follow two broad approaches to pay off your loan:
- Debt Avalanche Strategy: This strategy involves paying off higher debt with higher interest rates and diverting any excess resources available towards the repayment of these types of loans
- Debt Snowball Strategy: Debt snowball is opposite to the debt avalanche strategy as here you pay off your smaller debts in order to focus on your larger debts later
Optimise Undertakings to Ensure Cash Flow Stays Unaffected
Consider this situation where you, as an entrepreneur, has taken a loan of ₹50 Lakhs for the expansion of operations and the total EMIs payable amounts to ₹2 Lakhs.
However, if the monthly cash flow of your business is ₹2.3 Lakhs, it is impossible to run your business with the available cash reserves after paying your EMIs. At this stage, you can consider making minimum payments on certain credit accounts, and repaying one account in full.
This way, your working capital isn’t affected, and there is always enough cash flow in the business to keep things running. Alternatively, you could find ways to free up working capital to better accommodate debt payments.
Businesses can improve their cash flow by adopting certain short-term and long-term strategies. In the short term, businesses can try to achieve the following:
- Eliminate unnecessary expenses
- Negotiate for better terms on loans from the lender
- Offering discounts to drive in revenue
- Adopt short-term business models to drive sales
In the long term, businesses can follow these methodologies to improve their cash flow:
- Forecast your budget and analyse them in light of the actual results and try to understand the reasons for variations
- Identify newer ways to bring capital to your organisation and leverage them to expand your cash reserves
- Improving the operational efficiency
Factor in Prepayment into the Repayment Strategy
Prepayments are of two types: part-prepayment and foreclosures. The former allows you to make a partial payment to reduce the outstanding business loan amount. However, the latter means paying off your entire loan before the end of its tenure.
A prepayment lessens the outstanding loan amount or makes it NIL, and hence, your total interest cost also reduces.
Consider that your company has availed of an IIFL Business Loan of ₹20 Lakhs, for which you need to repay ₹4.5 Lakhs of the principal amount in the first year. Now, at the beginning of the second year of the tenure, the outstanding balance would be ₹15.5 Lakhs.
If you decide to pay ₹5.5 Lakhs more at this juncture, you will only have to pay interest on the remaining loan amount of ₹20 Lakhs. This would significantly reduce the total interest amount that you will have to pay.
Consolidate or Refinance the Loan
Refinancing is another business loan repayment strategy that you can avail in order to reduce your cost of borrowing. It involves availing of a new loan with more favourable terms to pay off your existing loans.
These favourable terms may include anything from reduced interest rates, and reduced EMIs, to longer tenure, which may help you in better debt management.
Consider that your company has three loans of ₹10 Lakhs, ₹15 Lakhs, and ₹25 Lakhs. You can avail of an IIFL Business Loan on favourable terms to pay off these debts and reduce the stress of higher repayments.
Negotiate for the Better Terms
If your business has been a long-term customer of a bank and paid off your previous debts on time, you can also negotiate for better terms.
However, you need to bear in mind the following when negotiating with your lender:
- Prepare a comprehensive plan about your revenue, expenses, and debts to make a point about your ability to repay the loan amount
- Research thoroughly what other lenders are offering and make a strong case about how lending to your business can be beneficial for the lender
- Demonstrate to the lender why you are not able to meet your current financial requirements and how you will generate enough revenue in future to repay the loan
- Understand the restraints faced by the lender and try to reach to mid-ground on what favourable terms could be
An effective debt management strategy reduces the chances of excessive debt, missed payments, high penalties, and bankruptcy. However, note that debt management is also a challenging process as it requires high levels of discipline, commitment, and adaptability.
Whether you decide to rework your budget or consolidate the loans, the key to maintaining your business’s financial health is to choose the right strategy and stick to it.