Effective Debt Management Strategies for Small Businesses

As a small business owner, your business’ financial health is very important and can be impacted by a wide range of factors. One of those factors is how much debt you build and your ability to repay it. To many small businesses, debt can seem like the big bad wolf. While it is important to avoid overspending and racking up debt that you can’t pay back, not all debt is “bad”.

Whether you have “good” debt or “bad” debt, however, there are a few key strategies to utilize as a small business owner in order to manage your debt effectively and keep your financial health in check.

“Good” Debt vs. “Bad” Debt

First, let’s dive in to why some debt might be considered “good” for your small business versus other debt that is not so much. The fact of the matter is that you need to build some form of debt to improve your financial health and build/improve your credit history. Examples of good debt can include purchasing real estate, investing in education, and starting a business. Essentially, good debt is anything that generates additional income or improves your financial health due to appreciation in value.

Bad debt, on the other hand, is a loan on any asset that quickly depreciates, will not increase in value, and typically has high interest rates. High credit card balances are a good example of bad debt.

Strategies for Effectively Managing Debt

Debt is a different ball game for each individual small business, but there are several overarching strategies that help small business owners best manage their debt and stay ahead of it.

1. Evaluate your budget — A comprehensive budget of your income and expenses will help you ensure you can afford your monthly payments and will also help you determine which debts to pay down first.
2. Re-visit your interest rates — High interest rates are one of the primary barriers to paying off debt, and if you have a long repayment term, the longer you will be accruing high interest. You can attempt to reduce your interest rates by negotiating a lower rate with your lender, using a balance transfer card with an introductory 0% APR, or considering a debt consolidation loan.
3. Determine a debt repayment plan — There are two primary debt repayment strategies: the avalanche strategy, and the snowball strategy.
   1. The avalanche strategy suggests you first make the minimum payments on all your debts, then put anything that’s leftover toward your highest-interest debts.
   1. The snowball strategy recommends you put any extra money you have toward your smallest balances so you can eliminate them quicker and shorten your list of payments, then move on to the next smallest balance.
4. Consider debt consolidation — There are two types of debt consolidation options: a 0% interest credit card and a debt consolidation loan.
   1. A 0% interest credit card allows you to transfer all your debts to the card and pay the balance in full during the promotional period. The amount you can transfer depends on your approved credit limit and you will start to accrue interest after the promotional period ends.
   1. A debt consolidation loan allows you to use the borrowed loan money to pay off your debts, typically at a lower interest rate. Depending on the type and how much debt you have, the length of your payment terms, your interest rates, etc., consolidating may or may not be the right option for you.

Reach Out to the Experts

If you’re not sure which debt repayment strategies are right for you, need guidance on setting up debt consolidation, or you just want to consult with an expert before making any decisions, our team at Republic Bank is here to help. Please feel free to reach out to us by calling 800-526-9127 and explore other financial tips here.