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Finance

How to get your business out of debt with effective debt consolidation?

Summary: Here are 5 smart ways to avoid business debt. Learn how you can use a debt a consolidation loan or other refinancing options to save your business.

21 Oct 2022 by Team FinFIRST

Let’s face it. It’s not easy to run a business. And it’s even harder to finance one year after year. Every now and then, entrepreneurs are required to depend on debt options to manage day-to-day expenses or expand into newer avenues. This often means that a pile of loans can easily spiral into a vicious debt trap.

If at some point you too have asked yourself ‘how to get my business out of debt’, here are some practical tips for managing your finances and reducing your debt load. To start with, you can opt for debt consolidation and combine all your loans in one place to give you a better view of your business debts. You can also reassess the debt funds you currently use for your business and consider rearranging them.

Before we discuss the various means of reducing business debt, let’s understand what it means to be in a debt cycle.

What is a debt cycle, and is your business in one?
 

A debt cycle is a pattern of continual borrowing that translates into more outstanding debt and higher costs. It also increases your chances of defaulting on payments and could call for serious attention. In other words, when your spending overtakes revenues, a business can fall into debt.

While taking on more loans to recover previous debts is tempting, it isn’t always prudent to do so. Doing this can escalate interest costs further and spiral your debt beyond a point of control. You can avoid such a situation by strategising your financial outlook and resorting to debt consolidation when needed.

Read on to find out how to get out of a debt trap.

 

Five smart ways to avoid business debt
 

Since we know what a debt trap means for your business, let’s understand how you can avoid it and run your business smoothly.

1. Assess your debt
 

If you haven’t done so already, make a list of all your debts to get a better idea of where you stand. Further, sort them out by interest rate and monthly payment. You can further calculate your debt-to-income ratio to understand your position and ability to pay off your debts.

Very often, not keeping a tab on your debts can land you in serious trouble. So, it is advisable to maintain an Excel sheet or have your finance team review the amount going out each month as interest and principal payments on your business loans. You can also consider closing out some of your existing loans by paying them off using your excess profits.

2. Create a spending budget
 

Much like you would for your household, it is important to have a spending threshold or budget for your business. Based on the assessment of your debt, make a spending plan that does not burden your business. Further, it is important to indulge in deeper scrutiny at this stage and have an emergency fund ready.

To ensure there are no expense leaks or unnecessary costs, it is important to inspect every aspect of your business. To do this, you can use a proven technique called zero-budgeting. In this method, your income should be used entirely to pay off your debts for a said period. If you have excess profits, you can utilise that to pay off more debt or invest it into your business.

3. Cut down on costs
 

Another way to save money (and use it to pay off debts) is to analyse your current costs and see if they are necessary for your business. For instance, if most of your staff is working from home or remotely, reassess your need for an office space. Downsize your current office or lease out a co-working space on a need basis instead.

Similarly, re-look at your advertising spending or marketing budgets. Try organic marketing channels instead of paid ones, or rework your advertising strategy to reduce costs. After all, every rupee saved can help clear your existing loans, saving you from a debt trap.

4. Increase business revenue
 

Instead of focusing on the negatives and stressing over them, another great way for effective debt repayment is to bring in more profits that can be used to pay them off as quickly as possible. Focus on ways to increase business revenues instead of fretting over the number of loans that you still have left to clear out.

You can also earn more significant business revenues by upselling your existing customers, redefining your sales approach, introducing new products or services, and other means. However, while trying to increase profits, be mindful not to add more costs than needed. Make the best use of what you already have to drive more revenue. 

5. Consider debt consolidation or refinancing options
 

Instead of taking multiple loans, think about refinancing your current debt situation. Take one loan at a lower interest rate to pay off all existing business loans. Also, don’t fall into the trap of taking personal loans to clear off business debts.

You can benefit from a lower interest rate or monthly payments (or both) through refinancing, which will reduce your debts effectively. As part of debt consolidation, a lower interest loan can be used to repay the original loan or to combine several loans into one big loan. In addition, business credit card debt can also be refinanced or consolidated with the help of smart financing tools.

Get a better hold on your financing needs
 

The tips outlined above should let you effectively reduce business debts and positively restructure your business approach and income streams. To enable you to consolidate your debts in one place, IDFC FIRST Bank offers business loans at lucrative interest rates to entrepreneurs, small businesses, and growing firms. You can avail of collateral-free funding up to Rs 1 crore, or quick funding up to Rs 50 lakh based on your current account statement, or funding of Rs 50 lakh in line with your GST returns – that too without any cumbersome process requirements. 

Take charge of your business debts today!

 

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