Reduce your interest expense in three easy ways
Rising interest on debt can be a curse when running a small business. However, there are some quick and easy policies you can start using to reduce interest expense for your business.
Individually, small steps can add some value to a business, but when combined they can make significant differences. Think of your business like a car in development. Improved aerodynamics, fuel injection and weight loss might separately increase fuel economy slightly. However when used together they could make the car a market-leader.
Here are three easy tips you can implement in your business to combat the effect that rising interest might have on your bottom line.
Deposit payments straight away
Get into the habit of depositing payments promptly. Payments waiting to be deposited or money left sitting in your cash register aren’t working for your business. You could also save time and money by encouraging electronic transfers directly into your bank account.
When in your bank account, these amounts can either reduce your overdraft and save you interest charges, or add to your bank balance and earn you interest.
Improve your debt collection
Follow up on payments as soon as they fall due. A friendly follow-up call should reduce the amount of time you wait to get paid. It will also lessen the period you effectively provide interest-free loans to your customers, while paying interest on the money you’ve borrowed.
Another way to encourage prompt payment is to present customers with an early settlement discount. Offering a 5% discount for payment within 30 days, or a 10% discount for payment on delivery, can speed up your collection of debt.
Manage your purchases and payments
Most small businesses have a lot of money tied up in stock. If you’re able to moderate this by managing your purchases better, you can decrease the amount of money you borrow and the interest charges you’ll have to pay.
A manufacturer can reduce stock levels by using just-in-time ordering. This ensures raw materials are delivered a few days before they’re needed, rather than months before. A retailer can use a similar approach by cutting stock levels and drawing on a supplier’s reserves after each sale.
Talk to your suppliers about your requirements and help them to anticipate your stock needs. They should be able to provide you with an efficient stock servicing solution. This will allow you to reduce your stock levels, plus the amount you’ve borrowed to pay for the stock and the interest you’d pay.
You can also use your supplier’s terms of payment to your advantage. If you have credit terms from your supplier, you have access to non-interest bearing credit. Use this as much as possible, and ask for favourable terms from other suppliers. This reduces the amount of interest-bearing money you’ll need to borrow, and the amount of interest you’ll need to pay.
The amount you can save by introducing these small changes to your business could add up to significant savings over a year or two.