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Avoiding Debt Problems

Simple Alliance, Kenya Limited

Business Debts

You may not entirely avoid debts while running your business. This is because for your business to grow (when growing a business), substantial cash input may be required. Caution needs to be taken though so as to avoid debt problems. Indeed, unmanageable debts are a significant small business finance issue.

Financing Options

Some financing facilities you could seek include:

  • A personal loan
  • A bank loan
  • Trade credit
  • A revolving line of credit

Deciding Whether or Not to Take a Loan

If the cost you incur by taking a loan is less than the expense you’d incur if you financed your business using on-going revenue, its sensible to seek a loan. Some important principles include:

  • Your reasons for seeking a loan
  • Procuring the correct kind of loan
  • Effective planning
  • Strictly seek loans depending on present needs

Base Loan Procurement on Present Requirements

You need to only seek loans when there’s a need. This will save you from unnecessary expenses.

Your Reasons for Seeking a Loan

You could procure a loan for reasons such as:

  • Developing a credit relationship with lenders  
  • Undertaking capital acquisitions
  • Boosting cash flow
  • Improving working capital
  • Growing into new markets

Creating a Good Credit History with your Lender

In case you are yet to procure a loan from lenders, you could sign up for one.  You then repay in time. This helps you to develop a good credit history.  Your future financing pursuits could be helped by this good credit relationship.

Boosting your Working Capital

You could seek loans when contemplating boosting your inventory or increasing your business’ personnel. This usually happens when you are growing a business.

Growing into New Markets

Borrowed monies can assist you to survive after venturing into new markets. The cash could help you to handle challenges such as:

  • Extended collection cycles
  • Providing more attractive terms to your new clients

Enhancing your Cash Flow

Loans can boost your cash flow especially if you are repaying some long-term debt obligations.

Making Capital Acquisitions

Loans could help you to acquire new machinery so as to:

  • Grow your product line
  • venture into new markets

The Correct Type of Loan

You could go for long-term or short-term loan depending on your circumstances and needs. You need to only procure short-term loans when you have short-term needs.  You gain two key advantages from this principle including:

  • Avoiding g restrictive long-term borrowing conditions
  • Avoiding higher interest costs

Effective Planning

Proper planning of your capital needs helps to project your cash needs. You can thus identify periods when cash will be needed and the actual requirements.  

Capital Plan

Your capital plan needs to have components such as:

  • A pro forma statement for the next one to three years 
  • Comprehensive analysis of your balance sheet that helps you to examine liabilities, cash flow, and assets 

No Planning Scenario 

Without the plan, you will suddenly be compelled to take an emergency loan amidst a financial crisis.  A key downside is the possibility of having to cope with very unfavourable loan terms.  

With Proper Planning

Appropriate cash forecasts will alert you about possible cash crunches in time. You will thus have time to seek out appropriate loan facilities. You will also have time to negotiate for favourable terms.     

You may not always avoid loans. Some instances, such as, when growing a business, call for loan procurement. Prior to and once you procure them, you need to effectively manage the arising debt. Some debt management initiative you could take include; proper planning, matching needs with your loan debts, knowing exactly why you are borrowing, and procuring the right kind of loan. Following these recommendations will help you avoid debt problems which are a significant small business finance issue to date.

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Bernard Nyambega, Nairobi, Kenya  |  October 17, 2012
It well explains part of the risk management for the small-holder.