Debt trap is now strewn all over business enterprises. Small businesses, large ones and even multi nationals have unwittingly got into the debt trap, modern day version of apocalypse. Debt trap occurs when a business gets into a vicious circle where it borrows more money to pay up the debt already owed. Finally the burden of debt brings in disastrous results for the business, society and for the economy. So how business can avoid disaster and get out of debt trap. Here are few suggestions:
1. Contact the banker/financier for working out the current loans. Work out is a method where banks acting on their own re-schedule loans and offer concessions regarding interest payments, declare moratorium over whole or part of the accumulated interest and grant flexible terms on amount and timing of instalments due
2. Go for re-structuring of the current debt on your own. This method is different from the first one as you will be taking initiatives in managing debt and submit your proposal for negotiating the terms of the current debt. Of course, such re-structuring must have the approval of the banker/financier
3. Replace expensive finance with cheap finance. In most cases business, particularly small business tends to borrow more when the interest rates are fairly high. Interest rates generally move up and down depending on the state of economic growth. During high economic growth interest rate also hovers in high zones. Business, encouraged by positive atmosphere prevailing in the economy blindly ties up with debt at expensive rates. When economy moves into recession interest rate falls into low levels. Therefore during recession small businesses must make an effort in replacing loans booked at high rates with cheap alternatives
4. Talk to your creditors who have supplied materials for business operations. You can ask them for an extended time period to pay out the amount owing. In the case of expense creditors, generally this concession is not available. For example, electricity companies do not negotiate on arrears and tend to cut supply lines. You also have a tall order in negotiating with statutory creditors such as Revenue Department
5. Reduce operational cost as much as possible. I am afraid you cannot do this overnight. But if you put an effort you can cut corners in operational cost without much harm being done to your production line
6. Dispose fixed assets that are no longer wanted. Many business enterprises dump huge amount of finance buying up assets without doing a proper evaluation as regards to their usefulness; added to this, business generally does not bother about re-sale value of fixed assets at the time of acquisition. Hence, you have a double whammy: on one side the economic value of the assets in the current scenario is less and if disposed it could fetch much less than the original cost of purchase. You have to take hard decision and sell at some prices even though you have to take loss eventually
7. Budgeting is your weapon of mass protection; you should put in operation budgeting with a short term roll-over. I suggest that the budget exercise is rolled over every month till such time you are out of the debt trap. You must budget both the income as well as expenses on equal keel. You have to put extra effort in increasing sales revenue and pitch on chasing receivables to get the cash flow in
8. Finally let cosmics be your pull and push factor. Cosmics are aspects residing in every person and as an extension in every business. Cosmics can function as pull factor when you go for negotiation with your banker/lender or that particular customer who is promising you a big order. Cosmics play the push factor when you are impelled to change your business outlook, make a face –lift, bring in courage and confidence to weather the storm and at last succeed in getting out of the debt trap.
No comments:
Post a Comment