There are various ways how to manage home business debt and it is worth knowing because home businesses are not looked at as favorably as businesses in commercial premises.
Any business, be it home based, or commercial, involves a substantial amount of risk.
Some businesses have a reasonably even income all year round whilst others fluctuate, some seasonal businesses can fluctuate quite substantially.
Managing debt can be highly frustrating, which is why we have come up with a couple of great tips for managing your home business debt.
There are two types of debt: good debt and bad debt.
Good Debt is when you go into debt to buy an item that will either increase in value as it gets older (such as a commercial building) or to buy a piece of business equipment that will increase your productivity in the long run over and above the cost of purchasing the equipment.
Bad Debt is when you purchase an item that will not return any value to the business such as a new car which you don’t need for the business and which reduces in value substantially over time or buying business equipment that does not increase the sales or profit of the business.
Whether you borrow for good debt or bad debt it still has to be paid back.
Monitor your cash flow
The first step to managing debt is to carefully manage your cash flow.
One of the tips for managing business debt is to monitor your cash flow. This means that you have to keep a close check on the cash flow and the financial state of your business. Budget carefully allowing for seasonal ups and downs if your business is affected by this. Plan your expenditure leading into a busy time.
Determine any expense you can cut so as to increase the cash flow available to pay down the business debt. For example, you could save money by becoming more conscious about the energy/electricity that your business consumes or the packaging or the cartage that you are paying
Select a bank wisely
If you think you will need to borrow funds or take a loans from a bank then choose the bank that meets your need. For example, if you only need money for a small interval of time and will be able to pay back the principal really soon then you might consider a bank that charges you lower rates of interest. Or you may be able to get an overdraft for a short period with a reducing balance. Usually this will carry a higher rate of interest as the interest will be less according to the reducing balance.
Consider your options carefully. Your decision may depend on your appetite for risk and return.
You may seek short term finance if, for example, you had to fund a large purchase of stock for seasonal selling or if you have to purchase an asset for your business growth.
You have to pay the interest on your debt as soon as enough cash is available, and not default on your loans. You should make timely payments. Defaulting on your loans will affect your credit rating and make it very hard to acquire funds in the future.
Other tips for managing business debt include:
- It is a good option to pay off your debt instead of just making a monthly interest payment because that still leaves the principal amount to be paid. Try to pay off more than the monthly minimum requirement so as not to be worried about how to generate enough funds to pay back the principal amount in the end
- Another practical tip for managing debt is that you should sit down and understand the terms and conditions of your debt, because every kind of loan comes with strings attached
- Learn how to differentiate between the terms ‘wants’ and ‘needs’. Sometimes your spending habits can land you in a lot of trouble
There might be times when your business is doing well, or there might be times when your business is running at a loss. This may be due to an unexpected fall in the demand for the goods or services your business provides, or an economic slow down nationally, but if there is an expectancy that it will only be short lived then you will have to deal with debt in order to make sure that your business continues to survive until business picks up again.
These practical tips on how to manage debt in your home based business will surely help you sail through the rough tides easily. Regardless of good times or bad times, good debt and cash flow management is essential to the survival and growth of any business.
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