“That which we obtain too easily,
we esteem too lightly.”-Thomas Paine
Easy-to-Get Business Debt:
Why It Can Harm Your Business
Some business debt lenders specialize in providing access to funds for growth, operations, and innovation when cash flow is limited.
However, when business debt becomes too easy to obtain, it can lead to significant financial challenges, jeopardizing the very success it was meant to support.
Why is overly accessible business debt detrimental?
How can it erode financial stability?
What steps can businesses take to manage business debt more responsibly and work with the best lending partners?
[The Allure of Easy Business Debt]
For many entrepreneurs, the promise of quick and easy financing can be irresistible.
Lenders often market their products as hassle-free, offering instant approvals, minimal paperwork, and flexible repayment terms.
In an era where alternative (non-bank) lending platforms and online lenders have proliferated, accessing business loans has never been simpler, and more dangerous.
While this ease of access may seem like a boon, it often comes with hidden risks.
Entrepreneurs might be tempted to take on business debt without fully considering the long-term implications.
Moreover, easy access to credit can create a false sense of security, leading business owners to believe that borrowing is a solution to all financial problems when it is precisely the opposite.
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WHAT IS THE BEST AND SAFEST WAY FOR YOUR BUSINESS TO DEAL WITH BUSINESS DEBT PAYMENTS WHEN YOU CAN’T GET REFINANCED?
It is NOT by stopping ACH payments.
It is NOT by taking on another business loan.
It is NOT by entering into a debt settlement program.
It is NOT ALWAYS a refinancing.
Find out the BEST strategies to get your Business back to where it was
Setup a brief meeting with a business finance & strategy expert to discuss all of your options!
[The Risks of Overly Accessible Debt]
**Lack of Due Diligence**
Easy-to-obtain business debt often bypasses rigorous underwriting processes.
While this speeds up approvals, it also means that borrowers may not undergo the necessary scrutiny to assess their ability to repay.
Businesses that take on business debt without a solid repayment plan can quickly find themselves in financial distress including cash flow strain and inability to remain liquid or keep up with payments and expenses.
**High-Interest Rates and Hidden Fees**
Many business lenders that offer easy credit charge exorbitant interest rates or impose hidden fees.
These costs can balloon the total repayment amount, putting intense strain on business cash flow.
Borrowers who fail to read the fine print may end up paying far more than they initially anticipated.
**Overborrowing**
When business credit is too readily available, businesses may borrow more than they need or can afford to repay.
Overborrowing can lead to excessive debt servicing costs, diverting resources away from essential operations and growth initiatives disrupting the core structure and operations of your business.
**Short-Term Solutions, Long-Term Problems**
Easy business debt often serves as a short-term fix for cash flow issues.
However, using borrowed funds to cover operational deficits, negative cash flow or other recurring expenses is not sustainable.
It creates a cycle of dependency on business debt, where businesses continually borrow to stay afloat rather than addressing underlying financial and operational inefficiencies.
**Erosion of Creditworthiness**
Accumulating excessive business debt can harm your business credit score.
This makes it harder to secure favorable financing terms in the future, as lenders view the business as a higher risk.
In extreme cases, a poor credit profile can disqualify a business from accessing any financing at all.
**Increased Financial Stress**
Managing multiple business loans with varying repayment terms can become overwhelming.
Missed payments, penalties, and escalating interest rates can exacerbate financial stress, diverting focus away from core business operational activities and growth initatives.
[How Easy Debt Undermines Business Health]
**BUSINESS Cash Flow Constraints**
High monthly repayments can choke business cash flow, leaving little room for other essential expenditures such as marketing, employee salaries, or other critical operating expenses.
When a significant portion of revenue goes toward business debt servicing, growth initiatives are often the first to suffer.
**Loss of Financial Flexibility**
Excessive business debt limits a business’ ability to respond to unexpected challenges or seize new opportunities.
For example, a company burdened with high debt may be unable to invest in new technology, fail to pivot to meet changing markets or to enter into new markets to expand and grow revenue.
**Damage to Reputation**
Failure to meet business debt obligations can damage a business' reputation among suppliers, customers, and investors.
This loss of trust can have long-lasting implications, making it harder to secure favorable terms in future business dealings.
**Risk of Insolvency**
In extreme cases, unmanageable business debt can push a business into insolvency, or inability to continue operating without drastic reorganization efforts such as business bankruptcy under Chapter 11 subchapter 5 or “Article 9” Sales under Uniform Commercial Code (UCC).
WHAT IS THE BEST AND SAFEST WAY FOR YOUR BUSINESS TO DEAL WITH BUSINESS DEBT PAYMENTS WHEN YOU CAN’T GET REFINANCED?
Setup a quick meeting and to discuss all options!
[Responsible Business Debt Management]
To avoid the pitfalls of easy business debt, it is crucial to adopt a strategic approach to borrowing.
Here are some best practices to consider:
**Conduct a Thorough Financial Analysis**
Before taking on any business debt, assess your business' financial health.
Understand your cash flow, profitability, and ability to meet repayment obligations.
Use financial ratios, such as the debt-to-equity ratio, to evaluate your borrowing capacity.
**Create a Detailed Repayment Plan**
Ensure that you have a clear plan for repaying the borrowed funds.
This includes identifying the revenue streams that will be used for repayments and setting realistic timelines for repayment.
**Prioritize Low-Cost Financing**
Seek out financing options with the most favorable terms, such as low-interest rates, minimal fees, and flexible repayment schedules.
Government-backed loans such as SBA Express or 7(a) or traditional bank loans often offer better terms than high-cost and short-term alternative lenders.
**Borrow Only What You Need**
Resist the temptation to borrow more than necessary.
Overestimating your financing needs can lead to wasteful spending and unnecessary and burdensome business debt servicing costs.
**Understand the Fine Print**
Always read the terms and conditions of any business loan or funding agreement carefully.
Pay attention to interest rates, factoring costs, repayment schedules, penalties for late payments, and any other hidden fees or costs.
**Diversify Funding Sources**
Instead of relying solely on business debt, consider other financing options such as equity investment, “friends and family”, or grants
Diversifying your funding sources reduces dependency on borrowed capital.
**Monitor BUSINESS Debt Levels Regularly**
Keep a close eye on your business' debt levels and ensure they remain within manageable limits. Regularly review your financial statements to identify any red flags sooner-rather-than-later.
**Seek Professional Advice**
Consult with business financial advisors and accountants to make informed borrowing decisions.
Their expertise can help you navigate complex financing options and develop a sustainable debt strategy.
While the accessibility of business debt has improved significantly, it comes with its own set of challenges.
Easy debt may provide a quick solution to immediate financial needs, but it often leads to long-term problems that can undermine the health and stability of a business.
Entrepreneurs must approach borrowing with a clear understanding of their financial situation, a well-defined repayment plan, and a commitment to responsible business debt management.
By doing so, businesses can harness the power of debt to fuel growth without falling into the traps of over-leverage and financial distress.
Remember, not all debt is good debt, and the ease of obtaining it should never outweigh the importance of careful financial planning.
Contact us for a complimentary intake meeting and an analysis of your business debt and cash flow.
Stefan Bernarsky
Managing Partner
BERNARSKY ADVISORS
www.bernarskyadvisors.om
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WHAT IS THE BEST AND SAFEST WAY FOR YOUR BUSINESS TO DEAL WITH BUSINESS DEBT PAYMENTS WHEN YOU CAN’T GET REFINANCED?
It is NOT by stopping ACH payments.
It is NOT by taking on another business loan.
It is NOT ALWAYS a Refinancing
It is NOT by entering into a debt settlement program.
Find out the BEST strategies to get your Business back to where it was
Setup a brief meeting with a business finance & strategy expert to discuss all of your options!
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