Navigating Business Debt: Understanding the Risks and Strategies for Success
Dry Cleaning Businesses Warned of Dangers of Debt: Expert Shares Tips for Managing Business Debt
CHICAGO — Dry cleaning businesses looking to grow and expand must be cautious when it comes to borrowing money, according to accounting expert Juliana Ramirez. Ramirez, who has over 20 years of experience as an entrepreneur and small business bookkeeper, recently conducted a webinar on business debt management hosted by the Service Corps of Retired Executives (SCORE).
In Part 1 of the series, we explored the different types of loans and credit available to small- to mid-sized businesses like dry cleaning companies. Today, we delve into how debt can impact a business and how owners can assess their current debt situation.
Ramirez highlighted several ways in which debt can affect a business, including the impact on cash flow through debt repayments, high interest costs, and constraints on day-to-day expenses. Additionally, the amount and types of debt can influence a company’s credit rating, potentially limiting access to future financing or resulting in higher interest rates for new loans.
While borrowing can be a valuable tool for business growth, Ramirez cautioned that excessive debt can lead to short-term financial survival rather than long-term strategic planning and growth. Managing high levels of debt can also be stressful for business owners, affecting decision-making and overall business management.
To evaluate their current debt load, Ramirez recommended several steps for business owners:
1. Create a Debt Inventory: List all outstanding debts, including loans, credit cards, and lines of credit.
2. Understand Rates and Terms: Know the interest rates and repayment terms for each debt.
3. Prioritize by Interest Rate and Type: Focus on high-interest debts and differentiate between secured and unsecured debts.
4. Calculate Total Debt Payments: Determine how much of your cash flow goes towards debt repayment.
5. Review Loan Agreements: Pay attention to fees, penalties, and conditions that may impact repayment.
6. Assess Impact on Cash Flow: Calculate your debt-to-income ratio to understand the financial burden of debts on your income.
7. Check Credit Score: Know your credit score to anticipate future loan options and interest rates.
8. Consider Collateral Risks: Understand the implications of failing to repay secured debts.
9. Develop a Repayment Strategy: Prioritize repayments based on evaluation, considering factors like interest rates and cash flow.
By following these steps, business owners can gain a comprehensive understanding of their debt situation and make informed decisions about debt management and repayment strategies. Stay tuned for the conclusion of this series, where we’ll explore strategies to pay off debt, negotiate with creditors, and final thoughts on the topic.