8 Effective Debt Management Practices

Successful business operations require a comprehensive understanding of the intricacies of debt utilization and management. While there are ‘positive’ types of debt, all liabilities should be managed carefully. Small businesses operating under a corporate structure should be mindful that directors have a legal obligation to ensure the company’s debts can be paid as and when they fall due. Those operating under an unincorporated structure are ultimately personally responsible for the debts of the business. Mismanagement of debt can have disastrous consequences. However, when managed properly, debt can facilitate a business’s success. We have firsthand experience of the value of the following debt management strategies across various sectors.

Strategies to Reduce Your Debt Burden

To become debt-free, you must handle your finances prudently. Here are eight methods for paying off debt:

1. Develop a budget to track your finances

A budget helps monitor your income, expenses, and other financial data. It can prevent overspending by eliminating unnecessary purchases, allowing you to track your income and spending more accurately.

2. Avoid adding to your existing debt burden

Refrain from making unnecessary purchases. Before taking on any new debt, prioritize paying off existing debts. Making frivolous purchases while carrying a balance on existing debts will only make debt management more challenging.

3. Make on-time, full payments to your creditors

Paying your bills in full and on time can help avoid excessive interest charges and late fees. Try to pay more than the minimum payment each month to keep interest and fees to a minimum if you are unable to pay off your debt entirely.

4. Double-check your statements annually

Verify the accuracy of your bills and statements to ensure there are no errors. Contact your lender if you notice any discrepancies or if your interest rate changes without explanation.

5. Reduce your number of credit cards

Limiting the number of credit cards you use can help you manage your finances more effectively. Ensure that you are paying the lowest possible interest rates.

6. When consolidating debt, seek the lowest possible interest rate

Debt consolidation loans and short-term financing options are available from reputable financial institutions such as banks and credit unions. They can simplify your finances by allowing you to make only one annual payment instead of multiple payments to your existing creditors. However, consolidating your debts may save you money if the interest rate offered by the financial institution is lower than the interest rates on the loans you currently owe.

7. Consult a credit counselor

If you are struggling to develop a viable strategy for paying off your debts, seek the advice of a credit counselor. Be wary of so-called ‘debt counselors’ who promise quick, complete debt elimination for a single, modest fee.

8. Maintain vigilance

After you have paid down or eliminated your debt, it is crucial to avoid falling back into the same situation. Consider phasing out credit cards and using debit cards or cash instead.