Manage your debt

Debt is often a vital resource that allows a business to grow. But getting into debt should be done with thought and prior planning. Businesses, like individuals, sometimes suffer from too much debt.

Taking on the right amount of debt and at the right time is the thin line between a successful business and one that fails. It often makes sense to access credit when giving a boost to cash flow, finance growth or for expansion.

It is therefore imperative that the purpose for the debt is clear and the business doesn’t deviate from its original plans.

Fall back
Whether your business borrowed to purchase some assets or to boost working capital, or for construction/expansion of your business, you need to think about your fallback position if circumstances, or projected outcomes vary. During the planning phase it helps to stress test your financials and play out different scenarios that could lead to distress and reduction in your anticipated cashflows.

It is imperative that you stick to the agreed repayment plan as stated in the loan agreement to minimize the likelihood of stressing the relationship with your financial institution.
Performance of your loan obligation is captured by the Credit Reference Bureau(CRB)which will affect any future chances of borrowing from financial institutions.

When it comes to insuring borrowings, it would do well for SMEs to take out insurance policies for their borrowings. These should not be limited to the cover on their properties that have been offered as security for the lending but also key man insurance that covers the life of the key directors in the event of death.

If one is dealing with goods, taking on insurance to cover these goods against burglary, fire, among others is highly advisable.

Communicate
If there is a change in expected cashflows, customers should immediately notify their relationship managers of these changes as opposed to defaulting and waiting for the bank to contact them.

This will display willingness and corporation and the bank will in term devise a way forward. SMEs could be affected by rising costs, over trading by growing too quickly and running out of cash resources, working capital gaps, long debtor days, increased competition, changes in raw material costs, industry and technological changes, inadequate marketing, among others.

Agreeing to joint strategies will not only enable the bank to achieve its goals but also turn around the customers business operations. Some of the strategies include but are not limited to; issuing additional funds where there are capital gaps, restructures, reduction in bad debt by allowing customer sale of non-core assets, obtaining equity partners to inject additional capital, professional assistance and advice, strengthening management, among others. Foreclosure and litigation are the last resort for most Financial Institutions.

Cooperating with the bank and being transparent allows for exploration of all available options and avoiding further distress. While litigation may seem like a viable option to delaying the inevitable, but it often will lead back to the same place where assets may have to be disposed.
During the process of litigation, the loan accrues penal interest which only serves to increase the obligation. The best approach is for the customer to negotiate a settlement of the debt in an amicable manner and minimise distress.
The writer is the head, special assets management at dfcu bank.