Avoid Short-Term Debt Traps With A Long-Term Business Loan

Managing your debt can help you achieve your business financial goals. However, one small mistake can quickly trap you in debt. Overwhelming debt can cause considerable mental and financial stress, also known as a 'debt trap’. Here’s everything you need to know about a debt trap and how to avoid one.

What Is A Debt Trap?

Debt traps occur when you have to take on new loans to repay your existing debts. Eventually, you are in a situation where you owe more than you can repay, and your debt spirals out of control. This situation is applicable when your debt obligations exceed your ability to repay.

How Can You Avoid Falling Into A Debt Trap?

1. Organize Your Debts

Make a list of all your debts and sort them according to their interest rates and monthly payments. Among these are business loans, business credit cards, lines of credit, and outstanding vendor payments.

Using this method, you can arrange debts from most urgent to least urgent and also by the payment dates. Work your way down by paying off the highest outstanding debt first. Stick to deadlines to prevent penalties and late fees from increasing your outflow.

2. Boost Sales

When your debt management plan is in place, you can begin working on ways to grow your sales.

There are several ways businesses can increase their revenue in the short term. Make your products or services stand out with a limited-time sales promotion. Providing discounts or coupons to your customers can also encourage them to spend more. A well-designed loyalty program can also increase customer acquisition and satisfaction, thereby increasing revenue.

A well-designed, tailored digital marketing strategy can boost sales and increase revenue in the long run. Affiliate programs, email newsletters, social media engagement programs, and website promotions are a few ways to achieve sales.

3. Cut Back On Expenses

The most effective way to reduce debt is to reduce business expenses. Look at your budget to identify unnecessary expenditures.

For instance, if you went paperless, how much would you save? Does your business need an office building, or can it work remotely? Don't be afraid to think outside the box when saving money.

4. Consolidate Your Loans

A business loan consolidation can lower monthly expenses without affecting your credit score. Consolidating your debt allows you to deal with only one creditor instead of many. You have a high chance of getting a lower interest rate as well.

Typically, a debt consolidation company will handle the negotiation and payment of your previous creditors. You can either take out an unsecured loan or secure it with business assets.

5. Shorten Payment Terms With Clients

Your clients may be on long-term payment plans. Perhaps they consistently make late payments. You might want to revise your payment terms in either case.

Consider offering 30-day payment terms to new clients instead of 90-day terms. You can collect unpaid invoices by proposing early-payment discounts or charging late-payment penalties.

6. Leverage Your Investments To Repay Debt

Investing in high-return schemes like mutual funds, equity, or bank deposits may provide you with an opportunity to reduce your debt. Once you've settled significant debt amounts, you can begin rebuilding your wealth.

7. Don't Take On More Debt

Paying off your existing debt with new loans increases your financial obligations and adds stress to your mental and financial health. Before adding to your debt, pay off what you already owe.

Apply For A Business Loan With IIFL Finance

You can reduce your payment and interest rates by consolidating multiple outstanding debts into one loan. Apply for a business loan with IIFL Finance to consolidate your debts and avoid getting your business into a debt trap. We offer quick payouts, lower EMIs, and a convenient repayment term. Moreover, with our business loan calculator, you can calculate your EMI amount and plan your payments accordingly.

Frequently Asked Questions

Q1. How do you avoid debt traps?
Ans. Reading your debt terms and paying your bills on time will help you avoid debt traps.

Q2. How does debt consolidation help with a debt trap?
Ans. Consolidating your debts involves taking out a new, lower-cost loan to pay off several pending debts. It reduces your financial stress and increases your chances of avoiding debt traps.