If your business has recently seen an uptick in sales revenue, and you are emerging from an economic downturn or crisis, you might want to start looking for ways to reduce your business debt. Reducing your business debt, also known in financial terms as “reducing your debt-to-capital ratio," can help your business get onto a stronger financial foundation, potentially reducing your cost of borrowing and making it easier to invest in future growth.
If your business has taken on a level of debt that you feel is excessive, and you want to clean up your company balance sheet, consider these strategies to reduce your debt.
Improve Your Profitability
It sounds obvious, but it's true: If you want to reduce your business debt, it helps to boost your revenues and/or reduce your costs. Getting more profits flowing into the business will improve your financial strength and give you options for how to deploy that cash; whether you want to invest in new growth or pay down your business debt.
A few big-picture ideas for improving profitability might include:
- Increase Your Revenues – If your business' sales are increasing due to a recovering economy, this could be a natural moment of opportunity to pay down debt. Sometimes improving your top-line revenues is the fastest way to boost your bottom-line profits.
- Raise your prices – How price-sensitive are your customers? If you're in a highly competitive commodity industry where you don't have much price flexibility, raising prices might not be a viable strategy. But if you are in an industry where you can position your company's products or services as a premium option, raising prices (especially during a strengthening economy) can send a market signal that your company is worth paying for.
- Cut costs – Take a hard look at your budget. Many small businesses have already cut back on non-essential spending. Be prepared to go further and think strategically about where your company is spending money and whether you're getting a good return on that investment. Are there product lines that are unprofitable that need to go away? Are certain business processes too expensive to keep in-house, and could be outsourced more cheaply? Is your company becoming less competitive in certain markets or regions where you do business, to the point that it makes sense to get out of those markets?
Enhance Your Cash Management
Is your business leaving money on the table by not maximizing your cash management? Many small business owners might not realize the opportunities of getting more strategic with cash management, such as getting paid faster, automating your cash management, and extending your float when paying bills.
Improving your cash flow with better cash management practices can help you get better flexibility with your working capital for paying down debt. You might be able to free up some spare cash each month that can be put toward paying off debts faster.
Talk to your banker on a regular basis about your company's overall cash flow needs. Your small business banking partner might be able to recommend cash flow solutions for your company's specific challenges.
Restructure or Refinance Your Existing Debt
Is your business currently paying high interest rates on debt that could be refinanced at a lower rate? Depending on your company's creditworthiness and the overall financial environment, you might be able to qualify to restructure or refinance your business debt at lower interest rates with lower monthly payments.
If you qualify, there are a few options to refinance your business debt or rethink the way you borrow in a way that saves money for your company:
- Small Business Administration Loan – There are several types of SBA loans that can be used for refinancing business debt at a lower interest rate or a longer term. Depending on your situation, SBA loans might be the most flexible, favorable option for refinancing your business debt.
- Business Line of Credit – Is your small business still bootstrapping with credit cards? You might qualify for a small business line of credit that offers a higher borrowing amount and better flexibility on minimum payments, with a potentially lower interest rate.
- Term Real Estate Loan – If your business owns real estate, you can potentially qualify for a lower interest rate and longer repayment terms on a real estate loan that is secured by your business's real estate holdings.
These are just a few of the types of small business loans and financing options that First Horizon can connect you with to help your business grow. Talk with a banking professional to learn more about your options for small business borrowing that can help reduce and manage your business debt.
