Reducing your debt pains – getting control of your liabilities
Debt is a big problem in the US. If you’re a fan of Dave Ramsey and any of the other money-saving experts you see regularly on TV, you won’t be too surprised at the impact of debt on the US economy.
Debt is real easy to get, but it’s also real easy to not pay it off and get into trouble.
And this applies as much to your business as it does for your own personal finances.
If you let debt take over your business, it can do terrible damage to the future prospects and profitability of your business.
The problem of debt
Very few businesses have the capital needed to grow without resorting to taking it out credit cards or bank loans and borrowing large sums of money.
Businesses are built on loans: but with loans comes debt. And debt can be a corrosion that starts to eat away at the solid financial foundation you’ve built for your company.
So you need to review your business’s liabilities regularly, monitor your debt liabilities and have a plan in place as to how you’re going to pay off your debts as quickly and as cheaply as possible.
Interest on business loans is the real killer here.
For a short-term loan, that additional interest percentage has less of an impact. But if you’re paying off a loan over a longer period then that interest begins to build up – and eventually, you’re caught in a cycle where the interest that’s added each month outstrips the repayment amount you can afford to pay.
The trick here is to pay off the loan as soon as it’s possible to do so. The quicker you pay the debt back, the less you’ll end up paying in the longer term.
If you’re paying off a 30-year loan, but you have the ability to pay that off in just 10 years, you’ve immediately saved yourself a whole chunk of money – and will be better off as a business in the long run.
[Graphic showing what you actually end up paying when you pay over 30 years as opposed to 10 years. Steve Moss will need to add in the numbers here]
Interest paid Year 1
Interest paid Year 10
Interest paid year 20
Interest paid year 30
Total amount paid
$300,000 at a rate of 10%
$300,000 at a rate of 10%
A little suffering now to benefit in the future
Building up debt over time, and finding that you’re stuck in the cycle of meeting the repayments, but not reducing the debt, is a toxic situation for any business.
Even worse is, were the business to suffer a downturn, and having to make a choice between paying yourself or the bank. But the worse case is to have the bank call the loan and the beginning of a toxic death spiral. Don't fall into this trap.
The key here is to keep a tight control of your debt situation at all times and never to lose sight of the impact it can have on your profits.
If you’re dipping below your acceptable level of profit that will likely be due to the drain of those repayments on your income and the negative effect on your profitability.
So how do you make sure you reduce your debt pains and keep your long-term prospects looking positive?
Keep debt in front of you
– Know where your debts lie and keep on top of your debt situation at all times. The better informed you are about these liabilities, the more you can do to ease the debt pain.
Pay off the debt as early as possible
– Plough profit back into the business and pay off any debts as soon as you can. Take a short-term hit now on your profits to reduce a long-term pain in the future.
Don’t get caught in the interest cycle
– Check the terms and interest rates on any loans before you agree to them and make sure you can pay off enough each month to beat the cycle of interest on top of the loan. If you don’t, you’ll end up paying interest on the loan forever.
Struggling with your debt issues?
If you let debt get out of control, it can begin to limit your future plans and hold you back from achieving the business’s true potential.
If you’re experiencing debt issues and need a helping hand, please do come and talk to us. There are plenty of options we can help you with to minimize the impact of your debts and get you back on track to financial efficiency.
Contact your local Holden Moss office and let us help you get back control of your loans and remove your debt pains.