Choice has just released a report on managing personal debt in this time of financial stress. For some small business owners this debt may have been exacerbated by debt in their business caused by the slowing economy.
As for personal debt, in business there is good and bad debt. In most businesses some level of debt is necessary, firstly to commence your business, secondly to keep your business operating and thirdly to expand your business.
Business debt can be good as long as it does not get out of control. However, there are numerous reasons why it is not viable for a business to carry high debt levels for too long.
Often business debt can come with a ridiculously high interest rate, thus taking longer to pay and using up valuable cash flow. Carrying too much debt may also make it harder to reinvest when expanding your business or looking to purchase capital equipment.
Increased debt can take away from the quality of your end product or service as you take from your cost centres to meet debt repayments. As the owner of a business, high levels of debt may also cause higher levels of stress, affecting both your personal life and the decisions you make in your business, and once your business decisions become worse your final product suffers, thus affecting your reputation and ability to keep clients.
Debt may also lower the value of your business and make it less attractive to investors. Too much debt can become a cancer in your business and can cause your business to spiral out of control with the ultimate price being bankruptcy of your business and potentially yourself.
If debt does become a problem there are things that you can do.
1. Look at how your debt is structured and what it is secured against. If you can, your debts should be consolidated into one debt and secured against an asset, for example your house, this way you have the ability to finance your debt over a much longer period of time and at a lower interest rate. It should also be remembered that the good thing about business debt is that it is tax deductible so it is usually a good idea to pay off as much private or non deductible debt as you can and examine whether you may be able to just pay interest on your business debt. This also has the benefit of giving you more equity against which to secure your business. Any debt restructuring should always be done in conjunction with your accountant.
2. Look at your life style and take less from your business to prop up your personal life. For example, should you go on an expensive holiday? Do you need an expensive car? Do you need Foxtel? Again look at the Choice report for more tips on managing this.
3. See where your business can cut costs to make debt repayments. In taking this step, extreme care needs to be taken not compromise your quality.
4. Review your business structure with your accountant. This can affect the amount of tax you pay and you ability to defer tax whilst you repay debt. Your business structure will also play a vital role in protecting your personal assets if your worst fears are realised and a debt provider takes action against you.
The most important thing to do is to have a plan, rather than hope the problem will fix itself. It generally doesn’t at this stage of the business cycle.
Over to You. What do You Think? Post Your Comments Below.
Paul Jenkin is a partner with small business accountants Andresen McCarthy Partners
The Australian Small Business Blog