Still Looking to Whittle Down Debt? Try These Tips
A strong fiscal defense can help put your business back on offense.
It’s no secret within my circle of associates that I’m a sports aficionado. And though a poor gene pool limited my competitive success on the fields of play, I’ve learned from my years as a fan that a strong defensive strategy is the key to a championship season.
This same principle applies to running a small business., especially over the past five years. The popular mantra for almost every public, private, charitable, commercial or household organization has been to reduce debt. Unfortunately, it’s often easier said than done.
As a result of the economy’s swan dive, many companies that had previously been aggressive in leveraging their growth are still battling their way out of problems. That is, if they are still around at all. In contrast, businesses that defensively positioned their balance sheets during the boom years survived—and even thrived—despite the recession. Many have been quite successful at de-leveraging, and today they’re sitting in an enviable cash position with minimal borrowing needs.
Whether you’re cash-rich or your liabilities remain higher than you and your lender would like, there’s no time like the present to review your balance sheet for opportunities to manage and reduce debt. This not only improves your bottom line; it prepares you for both emergency expenditures and future opportunities that require cash. Here are some simple steps:
Carefully review all expenses. Is your business debt the result of overhead expenditures? Where are the opportunities for reductions—by consolidation, buying supplies in bulk or taking advantage of vendor discounts?
Sell unnecessary assets and apply the proceeds toward debt.
Restructure debt so that it is appropriately matched to its purpose. Long-term debt should be used for long-term needs [for example, capital improvements, equipment and facility expansion], while short-term debt [working capital lines] should be used to bridge the sales cycle between invoicing and collection. And NEVER rely on debt to fund losses.
Stretch yourself to make additional principal reductions. For example, if you have a loan with a principal balance of $500,000 and a 10-year amortization, an extra $1,750 per month could reduce the payback period to 7 years, and save you almost $50,000 of interest over the life of the loan.
Reward yourself last. Take out what you need to live comfortably and/or minimize taxes, but leave the rest in the company to reduce liabilities. And when your business has a “grand slam” year, congratulate yourself, but don’t celebrate with a big bonus to buy a new car or install a swimming pool in the backyard. Focus first on paying debt, both personally and corporately, before yielding to the temptation of “stuff.” Once you have a track record of consistent profitability and your liabilities are at a manageable level, put money away for potential business opportunities or emergencies. When these goals have been reached, then treat yourself.
Minimize use of credit cards. Unless it is an absolute necessity, this should never be an instrument to finance your business if the balances cannot be paid in full each month.
Talk to your banker about tying your line of credit to your checking account, so that excess cash is used to immediately pay down the balance, and then automatically drawn back when needed to pay expenses. The availability of this service may be dependent upon your bank’s collateral reporting requirements, but it’s worth it to ask.
Don’t try to grow your business using only debt. When the time is right for expansion or growth, be prepared to put your assets at risk, as well as the lender’s. If you don’t have the capital available, look for an investor. When things don’t go as projected [as is often the case] all parties will be happier that you’re not overwhelmed by debt.
Along with a consistent effort to plan and budget, these strategies will provide the defensive foundation for your business to excel in whatever arena you compete.
Even though I am in the business of making loans, I say “Bravo!” to those companies that have accumulated
cash and reduced debt. Good loans drive the earnings of the banking industry and are an absolute necessity for the bottom line; but community banks only prosper if their customers prosper. Your current liquidity is a testament to your financial and managerial skills.
Mark Fitzpatrick is senior vice president of Missouri Bank.
P | 816.881.8200
E | Markf@mobank.com
Return to Ingram's April 2012