Debt can play a huge part in how companies operate and grow. Business debt can aid business owners in their specific endeavors. But then, failure to manage debt efficiently can lead to costly consequences.
When Debt Financing Can Be Beneficial for Your Business
Many people are afraid of taking debts, let alone starting a business and applying for a business loan. But when it comes to businesses, debt financing can be a great way to gain access to your funding needs. Taking out a business loan and using credit cards can be beneficial for the following reasons:
Build Your Business Credit Score
You already have an idea of how important your credit score is. Your reasons for building your personal credit score should be the same as building your business credit score. You can increase your chances of getting approved for business loans with a higher business credit score.
Pay Your Staff
Sometimes, businesses need more cash to pay their existing employees. You may also require the services of temporary workers or outsource certain tasks for specific business needs. You can use debt financing if you require additional cash on hand.
Grow Your Business
Increasing your profits and growing the brand as a whole often involves more investment. When you don’t have enough funds to use for business growth, business debt can be your go-to option. This allows you to expand your business, acquire more materials and equipment, and start catering to more consumers.
Debt may seem like putting an additional strain on your finances. But in reality, business debt can help mitigate your own risk. Since you are not using your own money and assets, you have better protection in case your business fails.
Source Funds at a Lower Rate
Most business owners don’t have enough money lying around to support business needs. Since equity takes time to grow, you can use debt financing to pay for the expenses while growing your equity. Debt financing is also cheaper compared to equity financing.
Business Owners and Their Debts
No business owner would take on debt with the intention of falling behind their payments. You may have the right reasons to take on business debts. But falling behind business debts can be the cause of your brand’s downfall.
Your liability for the debts your business occurred will depend on many factors. For one, there’s your business structure to blame. With a corporate structure, you won’t be held personally liable even if your brand fails to pay its business debts accordingly.
However, when business owners sign a personal guarantee on a business loan is a different story. A personal guarantee enables business owners to get a business loan approval in case their brand does not have enough assets to use as collateral.
One can have different reasons for their failure to pay off their business debt. The first one is their failure to manage finances efficiently. Since business debt gives owners access to funding at no cost, this puts them at risk of taking their payments for granted. Once interest charges start kicking in and continuous payment failure occurs, their business debt continues to grow.
Some business owners acquire another form of costly debt, which is state tax debt. This can be due to 1099 for issues, withholding taxes, conflict with the Internal Bureau of Revenue, or worker’s compensation. Others acquire state tax debts through franchise taxes, bank levies, or accounts receivable levies.
Moving on From Massive Business Debts
How you move on from business debts will depend on the type of debts you have. For instance, those who have state tax debts can hire companies specializing in state tax relief. Most of the time, professionals would state the pros and cons of a corporate shutdown or business formation before letting you decide which path to take.
One can move past business debt through more efficient debt management. This can involve different strategies, including the following.
- Debt consolidation
- Cutting business costs
- Increase business revenue
- Encourage customers to pay faster
- Negotiate for better terms
- Get help
Best Practices for Better Debt Management
You may not be able to promise yourself to never use debt for your business. But since some business debts can be of great help, the key is to learn how to manage your debt wisely. Among the best debt management practices are as follows.
- Prioritize debts
- Rethink business budget
- Review all terms and conditions before taking on a debt
- Learn how to negotiate for better terms
- Work with reliable and trusted lenders
- Consider refinancing
Business debt, when handled the right way, can bring greater success for your business. The problem starts when business owners fail to keep the best practices of debt management in mind when taking on debt. While prevention is always a better option, debt management is the next best way to move on from a poor business debt situation.