As a business owner, being in debt can be a very stressful thing. Business ventures face the risk of getting into debt due to the nature of their macro and micro operating environments. Usually a business needs a steady flow of cash in order to operate effectively.
Sometimes the sales may not match your cash flow needs and you may have to borrow some money to sustain operations. Even though, there is such a thing as borrowing at the right time and for the right purpose, one must make sure they do not end up in bad debt.
Having a steady cash flow is important for the effective operations of any business, every business should try as much as possible to stay out of bad debt. A major cause of bad debt in most businesses is unpaid customer accounts. Having unpaid customer debts is likely to disrupt the cash flow of your business and negatively affect your operations.
Following up on any form of debt especially unsettled customer accounts can be tedious and time consuming. It can also distract you from the actual running of the business. Therefore it is crucial to have effective debt management strategies in place to keep your finances healthy.
In order to avoid getting into debt as business, cultivate the habit of:
- Writing down all your expenses carefully
- Creating a realistic budget that will help you manage your operations every month
- Cutting costs that are unnecessary and do not add value to your business
- Negotiating with your creditors and lenders on appropriate payment terms in the event that you have to borrow
How to Effectively Manage Business Debt Due To Receivables
In case you are in debt due to receivables, there is a way to get into the culture of managing your receivables on time. Here are some steps you can follow:
- Do due diligence on prospective clients: It is best that you check on how your customer is faring financially before you extend payment terms or credit. This is essential for accounts that involve large sums of money.
- Sign a comprehensive sales agreement: Ensure you sign an agreement with each client to making sure that you detail the terms of payment.
- Negotiate for collateral: If you must make a large transaction, it can be helpful to include collateral in the sales contract, to protect your business if the customer defaults in payment.
- Set reminders for overdue accounts: Make it a practice to remind your defaulting customers of their obligations in good time. Make phone calls and send friendly emails to remind them of their payments. Be sure to make them aware of the absolute deadline you have set.
Borrowing money as a business is close to inevitable, but here are some tips for business owners to utilize so that they may avoid defaulting on payments and incurring unnecessary fees or charges that come about from getting credit and loans.
- Do not settle business expenses with your personal credit cards: Many business owners are fond of using their personal credit cards to cover business expenses especially when the business is in the formative stages. The smart thing would be to apply for a separate credit card for your business purposes. Most Kenyan banks have business credit cards or corporate cards that can serve this purpose. This way your personal credit score will not be affected if payments from customers get delayed.
- Keep tabs on your finances regularly: It is imperative for a business owner to monitor their finances periodically. If the business is not faring well the owner must make tough adjustments to your budget in order to avoid accumulating debt. Always try and operate your business with a budget.
- Avoid the use of individual assets as security for enterprise loans: It is not wise to use personal assets such as your home or other properties for collateral. Instead use the enterprise assets. This is because in case the business fails to pay off the loan effectively, you end up losing your personal assets.
If you are really serious about avoiding debt, then change your habits as a business owner. It all starts with some financial discipline and having a financial vision. Always plan for all kinds of eventualities, so when complications arise and you need some money, you have a plan to attain it without sinking your business into debt.
Remember to consult a lawyer for advice on how to go about collecting your debts especially when it comes to dealing with your clients. Make sure that as you collect your debt, you do not end the customer relationships.
How have you managed your debt and have you experienced challenges when dealing with your debtors. Comment below and please let us know what has worked for you in the past. All the best!
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