There are a lot of factors to consider when managing a business of any size. Leaders of small to medium enterprises (SMEs) generally take a more hands-on approach to a broader range of responsibilities, with less expertise in each. Not every small business owner is well-versed in finance, and yet it is one of the most important aspects of any successful venture. A well-thought-out financial strategy is key to the triumph or demise of a business, and external funding plays a significant role in achieving either result.

Business debt can be a fantastic tool to acquire the working capital your business needs to grow and expand. Although, it can cause a massive headache if it’s not managed appropriately. One of the biggest mistakes SMEs make is taking on too much debt to support their overspending before they have the sustainable positive cash flow necessary to sustain their operations. If you want to put your SME in a position to succeed, take a look at these six tips to make managing your business debt a whole lot easier.

Tip #1: Organise Your List of Creditors

Whether your planning on taking out new debts or looking to stay on top of your existing repayments, you need to stay organised. The best way to do this is by making a list of your debt-related expenses and obligations. How you do this is up to you; however, a daily, weekly and monthly calendar is handy. Make sure to include both fixed and variable expenses so you can adjust your expectations when rates or fees change. Note the interest rates and charges attached to each repayment to build a deep understanding of where your money is going, when, to what magnitude, as well as why. 

Tip #2: Prioritise Your Repayments

Once you have a reliable calendar of outflows, you can formulate a strategy to optimise your repayments. There are two common tactics businesses use:

  • Pay down the smallest debts first. The idea is to eliminate debts fast by reducing the number of creditors you owe. This is easy to stick to and provides regular feedback as you quickly hit your goals.
  • Pay down the highest interest rate loan first. In terms of minimising your total expenses, this is the optimal way to pay down your debts. Loans with higher interest rates cost more to repay. By eliminating them first, you save more money in interest costs.

Tip #3: Negotiate your Payment Terms

The most common financial problem for SMEs is cash flow or lack of it. To protect your cash flow, have a chat with your creditors about your payment terms. Negotiate longer payment terms, where possible, to reduce your repayments and maximise your current cash flow. This, of course, needs to be balanced with interest charges. The longer you drag out the loan, the more total interest you will pay. Short term cash flow and liquidity is a business-killer, so if you’re in this position, negotiating lower repayments is one of your best methods for retaining more cash week-to-week. 

Tip #4: Consolidate Your Debts

If you have a lot of different debts floating around, they can often be hard to manage, even if you have a solid plan. Debt consolidation is a process where a lender takes all your debts (such as business credit cards, lines of credit and unsecured business loans) and groups them together into a single facility with one monthly repayment. The main advantages with this approach are a lower interest rate (as the lender would rather have all your business) and an easier to manage debt – you’ll only need to prepare for one repayment a month, instead of multiple.

Tip #5: Maintain a Long-term Vision

Things might be good right now, but it doesn’t mean the situation can unexpectedly turn for the worse – we’ve all seen this play out over the last year. Avoid taking on too much debt just because you can. Variable interest rates can, and will, increase. Your revenues may suffer in the short term, making repayments challenging to meet. When times are good, set aside an emergency account with savings for a rainy day – it may save you! Also, make sure to not skimp on building your brand. Intangible assets, such as your brand and customer loyalty, may prove to be a more valuable asset than a shiny new car bought on expensive credit.

Tip #6: Manage Your Debt Exposure

Keep an eye on how much debt you have relative to equity in the business and your ability to service the loans. This is also useful information to know when applying for additional financing. There are also smarter ways to fund your business that don’t rely on new unsecured debt. For example, debtor finance allows the use of your current outstanding invoices as security, turning those unpaid invoices into cash within a day – instead of what usually takes up to 90 days to hit your bank account. Rather than taking out debt, use your history as a business to secure funding from assets you’re already building with your customers as your business grows.

TIM Finance helps SMEs access the working capital they need to support their operations and expand their business.  Get the cash you need and make TIM Finance your partner for flexible business finance today.