If you own or manage a business, chances are you’ve had a helping hand in the financial department at some point. Whether you’ve taken out a loan to cover the cost of renovating the office, paid for a mortgage on the business premises, or simply have a few company credit cards, it’s likely you’ve had to monitor and manage your business’s debts.
You may hear the word “debt” and automatically think it’s a bad thing, especially for a business. However, a small amount of debt can actually be beneficial to a company. Low-level debt offers a business the opportunity to reinvest in its resources and operations. However, if your company has a large amount of debt, it can quickly begin to struggle, or even face insolvency.
Here, we explore how you can reduce the risk of complex debt and protect your business.
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How can debt be risky for businesses?
Taking on too much debt can cause problems for business owners, as it often hinders the company’s ability to produce a cash surplus. In addition, large amounts of debt may have a negative impact on investors who hold common stock in the business, as they will always be the last to claim payback from a company that has collapsed. They may be warier of getting involved with your business, as they will have a higher risk of loss, in comparison with investing in a company that has minor debts.
What are the riskiest debts for companies?
Corporate debt can be risky for businesses. It typically comes from commercial paper, short-term corporate debt that is a maximum of 270 days old, and bonds. Bonds are a kind of debt that enables a business to gain funds by promising investors they will receive repayment.
Secured debt requires collateral, and those offering the loan typically expect this to be a large asset, such as a property or an expensive vehicle. These assets are used as security and can be sold or liquidated if the company does not pay off its debt within the agreed timescale. This can be a huge risk for business owners, as they could lose their business premises or other assets needed to keep the company running.
How to reduce the risk of complex debt and protect your business
Many businesses find themselves facing financial woes, so it’s essential you manage your credit and capital appropriately, to ensure your business can survive these ups and downs. There are certain measures you can take to recover debt and reduce the risk of making late payments.
Set out clear payment plans and ensure you read the terms and conditions before accepting a loan. Once you’ve taken on a loan, set aside time regularly to assess your payments and make a note of any payment due dates. This will prevent your company from facing high-interest rates or even legal intervention. It would also be helpful to record any conversations, agreements or email communication surrounding your debts and loans.