5 minutes
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.
3.Build a Communication
Try communicating with your creditors and lenders about your situation, and maybe they will agree to help you out, especially if the business has a good standing with them. The lenders will also help you out as they would somewhat help you and get some money instead of the business filing for bankruptcy and getting nothing at all. It won’t work with all of the business accounts, but it is worth the effort to eliminate some of your debt up-front so you can work on reducing the rest of the debt.
4.Increase the Income
If the business could raise more cash, it would be able to repay debts quicker. There are some of the methods by which a business could accomplish this such as:
Play with the Prices
A raise or lowering of the prices could bring in extra revenue which would help in reducing the burden of debt. The raising of prices can provide the additional inflow of much-needed funds whereas the lowering of prices could help increase the volume of the goods or service sold.
Diversification
Adding an extra product or service could help in reaching new customers and ultimately increase the revenue of the business. Also, the company could venture into new markets which would assist in achieving a new customer segment.
These are two of the most used techniques that can help a business to increase the income. Some of the other methods are optimising the inventory, selling the surplus, etc.
5.Use Cash for Payment
Use cash to make purchases whenever possible instead of using a business line of credit or a business credit card. Payments with cash or cash equivalents help the business to eliminate the building of new business debts and do not allow the existing obligations to increase. Also paying in cash would instil a sense of saving in the mind of the management.
6.Fewer Expenses
All the purchases need to be made only if and when required. Before buying anything, be it office supplies or raw materials, the prices need to be compared between various vendors, especially on the capital intensive items such as machineries, infrastructure, etc. The money saved should be utilized to make extra payments to remove the debts gradually.
7.Debt Consolidation
If after the implementation of all the above strategies to your business it is still not able to eliminate all the debts, then business consolidation services should be utilised. A debt consolidation company would help you in converting all your debts into a single debt with a lower interest rate of lower monthly payments or both.
These are some of the debt elimination strategies that will help the business to eliminate all the accumulated debts of the company. Bringing the deficit to zero would help a business to grow more and focus on the other necessary developmental activities of the company. One can also look into the financial restructuring of the company.
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