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Balancing debt repayment with liquidity for recovering businesses

Balancing debt repayment with liquidity for recovering businesses

Increased credit access in recent times has been a boon for businesses. Access to the right kind of financing stabilises operations and has the potential to accelerate business growth. Different companies may employ credit for various purposes such as adding inventory, investing in technologically advanced assets, future-proofing themselves, boosting production, funding expansion, and ensuring short-term liquidity for cash-flow management.

However, due to the pervasive impact of the pandemic on businesses, the scenario today is quite uncertain. There are efforts to move back to normalcy, but during phases when the newer waves of the pandemic force Governments to impose lockdowns, there is inevitable disruption. While businesses are slowly recovering, many of them are getting tangled in debt traps and are looking at servicing multiple loans before income streams are reinstated. In such cases, the business needs to balance debt repayment with liquidity. 

Here are some pointers to find that balance:

Have a clear picture of the situation

This seems obvious, but it is worth mentioning that businesses need to have an accurate picture of their debt. It is essential to list the total amount of the debt, names of creditors, repayment terms, EMIs, tenures and due dates. Consolidate this information into one regularly updated document—monitor and review this information periodically to gain clarity of the current debt position.

This discipline will help in timely repayment and prevent the business from falling into the vicious trap of increasing debts due to late payments. 

Prioritise payments

Based on a clear picture of existing debts, businesses can prioritise repayments. For example, they can start repayment with the loan charging the highest interest rate. Or repay chronologically based on due dates to avoid late penalties. 

Additional Read: Which Types of Businesses are eligible to get a Term Loan?

Explore loan prepayment in case of surplus funds

In case an occasion arises where the business has access to surplus funds, it would be advisable to prepay loans and gain significant savings in interest. Besides saving interest, prepayment can also boost credit scores that help to access better loan terms for future borrowings. However, check if there are any punitive charges for prepayment of the loan in the sanction terms.

Use the emergency fund wisely.

Businesses need to have an emergency fund. As we have seen in recent times, difficulties and unprecedented situations such as the pandemic can cause a lot of disruption. Therefore, it is essential to safeguard this fund for servicing committed loan obligations during emergencies. 

Make sure not to misuse these funds for extravagant purchases or avoidable expenditures. These are rainy day funds especially carved out to meet basic operational needs in tough times and must be used so. 

Businesses running low on the emergency funds can consider liquidating fixed income instruments without penalties for early exits to top it up without adding to the debt burden.

Consolidate loans

Depending on the loan provider, it is often possible to consolidate short-term loans into a single one at the lowest possible interest rate. If not, the business could consider a balance transfer option, wherein a borrower transfers the outstanding principal to another lender to avail of a better interest rate. However, it is essential to consider the terms and conditions of the loan before taking this step. 

At Tata Capital, we extend our support to several businesses seeking additional support from their financiers in these challenging times. If you are looking to transfer loan balances from an existing loan, reach out to our representatives to know more. 

Additional Read: Everything You Need to Know about a Term Loan

Balloon payments

A balloon payment involves the repayment of the entire principle for a sum borrowed towards the end of the term. This option is exceptionally agreeable for businesses that are seasonal or that anticipate strong cash outflows at specific times before the loan tenure. In addition, since the initial repayments are lower, this type of arrangement works well for businesses with a short-term financial crunch but expect liquidity to stabilise and increase later on. 

For a business that has availed of multiple loans, this arrangement for a specific loan repayment structure could reduce the short-term burden while the company overcomes the current challenges.

Stick to the budget

The power of budgeting is often underestimated. Businesses can take a good look at their expenses and identify areas where they can reduce or cut down costs. 

Adequate liquidity is as vital for the business as is repaying debts timely to maintain a good reputation in the market. When both are balanced, the company can progress uninterrupted. This balance makes the business resilient and is the key to short term survival and longer-term recovery. 

Over to you

Today, as debt is more the norm than the exception, it is pertinent for businesses to have a system that will help maintain the balance of debt and liquidity. Reach out to financial experts at Tata Capital for more guidance on managing capital.

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