Credit Management

Best practices for managing debt

Businesses can benefit from using credit and knowing how to smartly and efficiently manage debt.

Published: October 23, 2019

Using credit may help streamline or expand your operations, but what is an appropriate approach to the debt that can be part of using credit, based on your company’s size and cash flow needs?

Carmen Brun, senior vice president of Small Business Term Lending at Wells Fargo, says it depends on various factors, including your industry’s trends and competition. You’ll also need to evaluate if debt stemming from credit contributes to product development or value-add services to keep your business competitive.

Consider the following tips to help you take control of your business debt.

1. Identify a target payoff date

Use a debt repayment calculator to determine how long it will take to pay off your debt, based on your existing loan balance and interest rate. Explore how different monthly payment amounts may impact your total interest costs over time — you may need to adjust your payment strategy to pay off your debt within a certain timeframe. This exercise can also help gauge how taking on debt will affect you long-term and if that impact is worth it. Brun notes, for example, “If I’m going to earn an extra $50,000 a year, am I willing to spend another $20,000 a year making payments? What value is that providing?”

Discover credit strategies for later-stage businesses:

Learn approaches to business credit for established businesses.

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2. Tackle high-interest loans first

Though research suggests paying off smaller loans first can be more motivational, it’s ultimately more beneficial to pay off the loan or credit card with the highest interest rate first. This approach may save your business the most, and may allow you to pay off debt sooner.

3. Consider consolidating or refinancing high-cost debt

Over time, you may be able to take advantage of more appealing options for debt repayment. For instance, consider consolidating your debts across multiple business credit cards into a single loan with fixed rates and an established amortization schedule to pay off the debt at maturity. Similarly, a consistent record of on-time payments may allow you to refinance a loan that carries a high interest rate into a new loan with a lower rate.

Creating a strategy to repay debt may help you balance business priorities, preserve cash for other needs, and reduce your interest costs. Talk to a banker or other financial professional for guidance on forming a plan to stay on track. Consolidation and refinancing do not eliminate debt, but they may make debt easier to manage or lower your monthly payments.