There are times in the life of a business that incurring debt is a necessary event. It could be necessary to fund growth, cover a temporary shortfall or buy new equipment which are all valid reasons and positive for the business if managed correctly.
The key is to understand your finances, the reason for the debt and how to efficiently cover the debt in a timely fashion.
Before even considering a loan, you must understand your current financial position, that is your regularly occurring expenses and your income streams. When the money comes in and when it goes out, what are the peaks?
Once you have a good understanding of your cash flow, you can then calculate whether you will be able to service a debt, making repayments on time over a given period. If you can’t service the debt without a struggle or having to juggle figures every time, then don’t even consider a loan, until such time that it doesn’t place such a burden on the business.
Once you have your loan in place, do everything you can to reduce the debt ahead of time, in some cases, this will give you room to negotiate better terms with your lender though it will depend on the terms and conditions of the loan. Be aware that paying out a loan early with various lenders, won’t be beneficial and can incur a fee so it will end up costing you more. Make certain you understand this before finalising the loan and ensure early payment will be beneficial and not incur penalties.
A number of financial institutions offer a business loan repayment calculator so you can see what options are available over the term of the loan. These calculators use the following factors—
- The initial amount of the loan
- The period of the loan
- The interest rate
- The payment frequency
- Extra contribution(s) made
- When the extra contributions start
- Lump sum(s) made and
- When the lump sums began
So by increasing the regular payments and/or making lump sum payments can reduce the term and reduce the amount of interest paid.
If you can, increase your productivity and reduce your inventory. This may sound counter-intuitive but if you concentrate on products which sell faster and are cheaper and quicker to make, it is achievable.
Negotiating better terms with your creditors for early payment can also increase your cash flow which can be used to repay debt.
Assess your current assets, is there anything which isn’t being used any longer, can anything be sold? This not only reduces clutter which is always a good thing, it can bring in extra funds to also service a loan.
Review your operations, can you make processes more efficient? Can you eliminate tasks? Again these assessments will make your business more efficient overall.
Of course, better terms, reducing inventory, decluttering etc. can in themselves improve your cash flow and maybe eliminate the need for a loan, so they are tasks which are worth doing and on a regular basis.
Lean is not being mean, it is being agile and efficient.