How to manage the debts of a business?

The world of entrepreneurship can involve various inconveniences, for example, debts, which are perhaps the most hated, but, at the same time, necessary. In other words, acquiring debt is something very normal and every day for every entrepreneur who wants to start or develop their business. 

However, this does not mean that debt becomes a never-ending nightmare, as there are different ways to manage the debts of a business, to be able to get ahead and achieve all your goals. At Learn Institute we will clear all your doubts and teach you how to manage your debts. 

Also read: How to manage your debts

Is it worth getting into debt to start a business?

It is difficult to imagine that someone enjoys or is satisfied with acquiring a debt, because, in addition to being economically dependent on an institution or financial entity, debt can cause certain problems if the stipulated requirements, payments or obligations are not met. 

However, as incredible as it may seem, indebtedness is one of the main factors when starting a business, since resorting to borrowed capital is usually a good alternative to start a business. This obviously if handled properly. 

To delve into this topic, it is essential to distinguish between good debt and bad debt. The first focuses on covering essential aspects of the business in order to generate greater wealth, for example equipment, machinery, facilities, and designs, among others. For its part, the second is responsible for solving current expenses due to lack of income, that is, acquiring assets that are not going to be used immediately or assets of the owner that are not related to the business.  

The reality is that many borrowers do not have a financial or savings culture that allows them to know how to manage debt or have a debt-financed. Despite this, more and more entrepreneurs decide to venture into this process with the promise of achieving the following points: 

• Obtain liquidity almost immediately. 
• Have the necessary capital to start a business or inject resources into an existing one. 
• Build a good credit history for future projects when payments are made in a timely manner. 
• Have control over the debt at all times. 

However, when it is not handled correctly it can lead to these consequences: 

• They become long and difficult processes and procedures to carry out. 
• Causes high commissions according to the type of debt. 
• Produces long payment terms that can be extended further if not covered within the stipulated time.
• Cause default interest, liens and lawsuits. 

Tips for managing your business debt

As we mentioned before, nobody likes having debts, but for many, it has become an excellent option when opening a business. Therefore, in order not to generate problems from the beginning, here are some tips to get out of debt. 

Identify your ability to pay
 

Before borrowing, it is vitally important to know your ability to pay. This situation is directly related to your income level as an entrepreneur; that is, you must consider whether your income is fixed or variable in order to determine a baseline as a reference. This means being aware of what you are willing to pay or cover once you have obtained the credit or loan. If you take the above into account, you will be able to implement payment strategies to cover what is required of you in advance. 

Avoid going deeper into debt 

A vital point to getting out of a debt is not to interfere in another or take a new one. Therefore, you should avoid all types of debt, no matter how small, such as the acquisition of unnecessary items, opening accounts, and credit cards, among others. Remember that your ability to pay should not exceed 30% of your total income. 

Do not depend exclusively on your business 

Although your business is your main source of income, it is important that you look for new alternatives so as not to depend solely on it. For example, you can diversify your business and complement your product with a service. 

Design an emergency fund 

Although it sounds like an impossible task to accomplish, the truth is that an emergency fund will allow you greater flexibility and openness in the face of crises. This, also known as an accounting reserve, can help you cover unforeseen expenses and, in a similar case, pay off part of your debt when your finances or numbers are not in good shape. It is usually recommended to accumulate between 2% and 5% of the net income of the period. 

Plan your payments and cut expenses 

Use a calendar or accounting software to keep in mind your payment dates. Similarly, if the site where you applied for your credit or loan allows it, make your advance payments whenever you can. Finally, do not forget to analyze your financial situation, in addition to making cuts to your expenses to get out of your debt as soon as possible. Remember that being disciplined not to spend on non-essential goods for your business is the starting point of all entrepreneurship. 

Although the above tips may seem simple, do not forget that good management is part of the preparation of the entrepreneur. If you want to become a professional in this field, we invite you to learn about our Online Accounting Course. Learn how to create a healthy, reliable and constantly growing business. 

What should you take into account before acquiring a debt?

It may sound repetitive, but it is important to make it clear that a debt must be taken with total seriousness and professionalism. It is not only about obtaining capital and borrowing for a certain time, but it consists of a process that, if not managed correctly, can lead to financial, social and even emotional problems. 

Therefore, before deciding to go into debt, consider the following: 

• Establish from the beginning the way in which you will use the money. This way you will avoid deviating from your entrepreneurial goals. 
• Check the best possible credit conditions, such as a fixed interest rate, non-capitalizable interest, comfortable payment terms, payment insurance and debt settlement in the event of an accident or natural disaster. 
• Try not to have another debt, as this could harm the granting of your credit, in addition to generating major payment problems. 
• Make sure you have a good credit history, in this way, you will have a better chance of approving your loan. 
• Be clear about the amount you will need and what you can afford. 

Remember that good strategic planning, a systematic process that a company uses to develop strategies that allow it to achieve its objectives can help you better manage your debt and cover it as soon as possible. 

Also read: Sales Goals: How to measure and compare current or past sales

How to get out of debt?

Although we would all like to have a secret formula or exact manual to get out of debt, the truth is that this is achieved through various strategies and work methods, for example: 

• Perform a complete analysis of your inputs and outputs to know your financial status. 
• Establish a payment plan in addition to the one that your financial institution has given you. 
• Limit the use of credit cards or other types of external financing.
• Create an accounting reserve to deal with any inconvenience, so that you do not have to suspend payment commitments. 
• Eliminate ant expenses not related to the business and separate them from personal expenses. 
• Negotiate your debt in case it exceeds you and you do not have the ability to pay.
• Try, whenever you can, to pay more than the minimum and reduce your debt slowly but surely. 

Conclusion 

Debts, like profits, are the daily bread of any enterprise. Without them, many business owners would not be able to start their new path. But far from seeming like an impossible burden to bear, debt can be the best alternative when handled correctly.