Debt can be a powerful tool if used wisely. It can facilitate expansion, help with cash flow, and enable investment opportunities. However, it can also put you out of business if mismanaged. Accountants can help you strike that fine balance between debt enhancing, not hindering, your business.
Business Debt Guidelines
Establishing the right amount of debt is a crucial decision for your small business. Your debt should align with your business plan, growth projections, and cash flow needs. Too much debt and you risk paying too much in interest, or worse, file bankruptcy. Too little and you leave growth and opportunity on the table.
The three main types of business debt, each with their own pros and cons, are:
- Loans
- Loans offer the benefit of predictable repayment schedules and good interest rates, but often require collateral and a long-term commitment.
- Lines of Credit
- Lines of credit are more flexible than loans, allowing you to take out only what you need to pay the least amount of interest. However, variable interest rates and the temptation to overborrow can get some businesses into trouble. Apply for a line of credit when your books look great, and then let it sit unused until times get tough.
- Credit Cards
- Credit cards are great for short-term cash flow management, and you can even earn rewards! But they come with high interest rates, so prioritize paying them off each month before you damage your credit score and ruin your chances to get a loan or line of credit instead.
Impact of Debt on Day-to-day Operations
As we mentioned above, opportunities can be created by well-managed debt. Locations can be improved and expanded, equipment can be repaired and replaced, and operations can run smoothly without cash flow fears.
On the flip side, limitations can be created by excess debt. A small business that’s already drowning in debt will have no chance to realize new opportunities, repair, or replace. Wild spending, gambling on uncertain growth, and failing to forecast can all lead to cash flow and debt problems.
Debt Management Strategies
Effective debt management is rooted in robust business planning. It involves setting clear objectives, understanding your business cash flow patterns, and aligning the debt load with those business goals. Consolidating high-interest debt, negotiating better terms with creditors, and prioritizing repayments can all improve your financial position. Maintaining monthly financial statements is another great way to stay on top of your debt load and understand the current vs. long term portions, interest paid, and debt-to-equity ratios. And as always, consider the tax consequences of debt repayment and fixed asset depreciation!
Working with Haworth & Company, Ltd.
At Haworth & Company we’re committed to empowering small business owners in Minnesota with the knowledge and strategies they need to run their business and manage their debt effectively. Our team of certified public accountants and business advisors are here to help you plan, strategize, and thrive. Give us a call or contact us today to learn more!
Disclaimer: This blog content is for general informational purposes only, should not be considered professional advice, and does not establish a client relationship. Haworth and Company is not liable for the accuracy of this information or the content of external links. Please use this information at your own risk, ensuring it suits your specific needs, and consult with a certified tax professional for your own personalized guidance.
