Taking a debt is a good option for increasing the amount of liquidity in hand, but too much of debt can cause many problems to the business. The basic concept of debt or loan is that you can get a certain amount of funds which have to be repaid after a specified date after adding interests, which will increase the liquidity of the company for the short term, but in the long run, it will be very tough to repay.
If there is an accumulation of debt, the company might have to file for bankruptcy, which means that the company will cease to function and the valuation of the company is gradually decreasing which would result in the disbanding of the company. In future, it would also cause a problem in any mergers and acquisitions in the future. This is why it is recommended that a business should acquire debts only in cases of emergencies, and try to repay the already earned debts as soon as possible.
The best way to avoid any such situation is by forming a debt elimination plan. A debt elimination plan is easy to set-up, but it is challenging to follow. However, in the end, it helps in the elimination of your debt once and for all. Top debt elimination strategies which a business should follow are:
1.Evaluate and Revise your Budget
The first step would be to have a clear understanding of the financial situation of the company and then to prepare a budget according to it. This would include making a list of all the debt and expenses that the business has and compared to the revenue generated. The unnecessary costs need to be minimised and slowly eliminated. The revision of the budget will help to lessen the debt of the business systematically.
2.Prioritise Payments
The payments of the debts need to be done in an orderly fashion. It is preferred that the payments are made according to the interest rates. Debts, loans etc. with the highest rates need to be paid off first as they would cost more over time. After this, you can focus on the payment of the other debts that are left.
