7 Tips for Becoming Debt Free

7 Tips for Becoming Debt Free

When you’re first starting your business, you need cash. You can get cash by taking out loans or opening a credit card. Be careful, though, because too much debt is risky. Once you take on debt for your company, it can be difficult to pay it off. Follow these 7 tips to help your company become debt free!

Take Stock of Your Debt

Your company won’t become debt free if you don’t know what debt you have. So, take stock of what you have.

Make a list of any debt you have – business loans, lines of credit, credit cards, and outstanding vendor payments. Pay attention to each interest rate and monthly payment so you can determine which debt to tackle first.

It’s completely up to you which debt you’ll work toward paying off first, but there are two common methods:

  1. Pay the loan with the highest interest rate first and work your way down; or
  2. Pay the loan with the lowest balance first, then add that monthly payment to the next loan and work your way up.

Consider Refinancing

When you’re reviewing your debt, make sure to review your loan agreements, too.

Ask yourself if you’re in the same financial situation as you were when you first took at those loans. Do you have a stronger credit history? Are current interest rates lower than your current rates? If you answer, “yes,” to either question, you might want to consider refinancing to get a lower interest rate.

Negotiate

If you buy materials on credit and have a long-term relationship with your suppliers, negotiate with them to get a better price and better payment terms. When you’re negotiating, emphasize your good payment history and your long relationship with them.

If you buy in bulk, it will be even easier to negotiate. If you don’t buy in bulk, team up with another small business before negotiating.

Consolidate Your Loans

If you have multiple loans, consolidate them so you only have a single loan payment every month. Consolidating your loans will reduce your monthly payment, without negatively impacting your credit score.

You’ll be able to take advantage of that lower monthly payment during lean months and pay extra during prosperous months.

Cut Costs

Cutting costs can help you free up some cash to put toward your debts. Review your expenses to see where you can cut back. Negotiating with your suppliers can also help you cut costs, without losing quality.

Review Your Budget

When you’re just starting out, you probably wrote your budget based on your goals and projections, not your actual numbers. There’s nothing wrong with that, but now that you have actual numbers, it’s time to revisit your budget.

When you’re creating your new budget, make sure you can pay your fixed costs (like rent and utilities), then your variable costs (like materials). After you’ve budgeted for those, earmark any extra funds for paying off your debt.

Shorten Your Payment Terms

If customers buy from you on credit, now is the perfect time to review your own payment terms. If, right now, your customers have 90 days to pay you, consider shortening that timeframe to 60 days. You’ll have better cash flow and fewer unpaid invoices.

If you don’t want to shorten your payment terms, but would still like to get paid sooner, offer a discount if the invoice is paid off early.