You might be wondering, Should you pay off your business debt early. I have a few thoughts on when to pay off debt, but first let us talk about the four factors that come into play.

There are four factors I want to share with you in this weekly episode of I Hate Numbers.

How does risk affect your loan decision ?

The first factor is risk. If the interest rate on your loan is high, then paying it off early could save you money in the long run. But if the interest rate is low or even zero, there may not be much of an advantage to paying off your loan early. There is also the risk of having mor fixed costs to deal with and gearing levels go up.

List to find out more and check out your gearing with our calculator.

When you owe money, there are two types of risk involved – the risk of not being able to repay and the risk of interest rates going up. If you think either one could happen, then it might be better to wait until your loan matures before paying it off.

Your Money Mindset and profitability

The second factor is personal attitude and mindset about money. Some people feel that they should always pay their loans back as soon as possible. Moreover, others believe that they should only repay when they can afford to do so. Sacrificing other important goals like saving for retirement or investing in a new home purchase is not on the agenda.a

The second factor is personal attitude or mindset about money in general. Do you feel like you need every penny you can get their hands on right now, and will do anything for more cash flow - even if that means taking on more debt! You may be the type of person that wants to pay down your loans as soon as possible. Maybe you do not want any extra monthly payments coming out of your account.

Perhaps you are very conservative with how much debt you take on and only borrow what you absolutely need. It may be that you choose to keep some loans outstanding longer than others just so you can make sure everything else stays afloat financially. Making those monthly payments without having too many other obligations piling up at once.

The third factor has more to do with how paying off debt will affect your profitability going forward. How much time and effort will go into managing those payments each month instead of focusing on growing the company.

What about action?

Finally, we come down to action, Should you pay off your business debt ? must not hurting you financially?

Prepare a cash flow forecast and see what happens if you decide to pay off your debts You need to manage your cash.

Cash flow is the lifeblood of any business, and it's important that you stay on top of yours. If you don't know where your money is coming from or going to, how can you make sure if paying off debt is a good move and everything runs smoothly?

That's why we created this FREE guide for entrepreneurs and businesses like yourself. It will help you understand what a cash flow forecast is and how it works so that you can better plan for success in your business. Check out our upcoming webinar-session on taking control of your cash.

You do not have to worry about making these decisions alone! Contact us to see how we can help you take Control of your Cashflow. Arrange an initial chat to talk options Our news section, FREE online calculators is there for you. Just click here now to get started!

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You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Should you pay off your business debt earlier than you need to? Hi folks. Welcome to episode 60 of I Hate Numbers, the weekly podcast show that's there to improve your money mindset, make more money in your business, save you time, and save you tax. My name is Mahmood. I'm the business owner of an accounting firm for over 26 years, helping a variety of clients from the acorn-size businesses to the oak-tree size.

I've worked across many different sectors from social enterprise, private companies, multinational, national, and I've been very fortunate in my business career to work overseas as well as in the UK. I've chosen today's podcast episode particularly because in the UK and around the world, Coronavirus’s loosening its shackles and many businesses are now receiving notices from their banks about paying off their bounce-back loans.

And those bounce-back loans are, as they imply, they were monies that were borrowed to fund businesses through quite a turbulent time. Many businesses that took out those funds, for myself, I took out the money that was there to actually get them through some challenging times, or also to act as a cash

cushion. Now, when it comes time to repaying those loans, and any loans in general, there are four factors I want to share with you about whether you should or shouldn't pay off your debt early. Let's crack on with the broadcast. The first thing we need to consider is risk, more particularly, what is your risk appetite?

What is your attitude to risk? We know that loan repayments represent fixed costs in your business, and those fixed costs represent a commitment that you've got to make, whether or not you're making profits in your business. By nature, if your business is quite slow and you've got a commitment to make that repayment, then obviously that puts an extra burden on you, and what that does, that also increases what's called operational risk in your business.

So therefore, what should that be? Now, obviously, the other side for that, if you pay off the debt earlier, it may reduce the ongoing risk of not having those fixed costs to meet, but it may have a negative and adverse effects on your cash flow. More of that later on in the broadcast. If you are somebody whose business is prospering and growing, having that regular commitment, those fixed costs doesn't actually necessarily represent a great risk to you, and if anything, you should be making more profitability and having surplus cash as a result.

The second factor to take into account is your own personal attitude. Now, our attitudes to money, our money mindset, if you wish, viewpoints on money, are formulated from very early age. These could be criteria factors that we're taking on board from our family, our friends. It may be our background circumstances.

For myself, I come from a family of nine children. Money wasn't particularly plentiful when I was growing up, and that's formulated and embedded some of my philosophies and attitudes to money. It hasn't necessarily made me go the other way around. In some areas, I'm very diligent and very wary of taking on too much debt.

In the earlier years of my own business life, my business was just starting up, I was operating from a back bedroom, and I was doing everything I could just to keep the wheels turning in my business from working part-time jobs, borrowing money recklessly probably in some cases, and over time, and with lots of credit card debt as well,

I vowed to myself to actually get rid of the shackles of debt. My attitude 26 years later is slightly different. But again, what is your own attitude? Do you get anxious with debt? Is that something that actually worries you? So, really address your own attitude to it, and if it can't be addressed, if you can't improve that, if you feel that it's weighing too much over your mind, then that's something perhaps you need to factor in as well.

The third factor, we've talked about risk. We've talked about your own attitude to money. And that attitude to money, by the way, doesn't just come to borrowing money, but it also comes to things like pricing, chasing people for money, how you view profit in your business. If you check out previous podcasts, which I’ll link in the show notes, then you will check out what we've said on that previously.

So, coming back into the theme of the podcast, cash flow, absolutely critical. Any business, whatever size you are, however complex you are, whatever industry that you work in, if you do not have cash or access to cash, say goodbye to your business. You will not survive. You will not prosper, you will not move forward.

Do not pass-go. That's the end of the line. So, paying back loan early may be very positive in terms of the level of risk that you don't have going forward. It may give you a good comfort feeling, but it also might mean that you remove a cushion if there's any volatility going forward. And even if you're planning to grow, having that cash

at disposal is going to be quite vital in funding that growth. Now, what you need to do, and I would recommend this to any business whatever stage you are in your cycle, whether you are starting up, whether you're looking to diversify, whether you're looking to perhaps go into new markets, whether you are on your next phase of business growth, you need to prepare a cash

flow forecast. You need to manage your cash. It's not just about preparing the document, but your cash flow forecast is your plan in numbers based on the ideas that you are looking to develop and that you have in your business. So, your cash flow, if I was to do no other document, if I was to recommend a business not to do anything else except this, then that will be my job done.

So, you must critically do a cash flow forecast. As a heads up, folks, I've got a webinar session coming up at the beginning of May. I'll put the link in the show notes here, which shows you how you can build your own cash flow, and why being in charge of that, and how you go about it is good news. Again, more of that in the show notes at the end.

So, cash flow, absolutely critical. Prepare one of those cash flows and then have a look to see what happens if you do pay off the debt early, if you don't pay off the debt early, what's the impact on the monies that you have left over to fund your business continuing and for any business growth? So again, cash flow.

Make sure you look at it. The fourth factor to take into account about paying off debt early is the impact on your own profitability. Now folks, when it comes to borrowing money, typically borrowing money falls into one of two camps. You either have what's called a repayment loan. So, if I was to borrow 50,000 pounds to fund maybe a deposit on a house purchase or assets in my business, then the lender will want me to pay back the 50,000 pounds that I've taken from them that I've borrowed

plus they want to make profit on that transaction, and the profit will be the interest they're charging me. What they'll say to me is, Mahmood, typically, you are borrowing this money over a certain period of time, maybe five years, 10 years. That's subject to the negotiation and what the conditions are,

and then, each month that you pay that back, I want to summon that 50,000 and I want some of the interest. Now in your profit, by the way, profit is only affected by the interest element of that debt. The remaining bits of money that you are chipping away at the 50,000 represents capital. It all comes out of your bank account, it’s only the interest that affects your profitability.

And remember folks, interest is tax deductible, so depending on what the level of debt you have and how much you paid for it to take it out, and the interest rate, the profit impacts may or may not be significant. The alternative type of loan, by the way, folks, is an interest-only loan, and that's where you borrow the same set of money, but actually your commitment to the lender is only to pay the interest on the loan,

and at the end of the loan term, i.e. after 5 years or 10 years, you pay back the original money that you borrowed. We've seen this type of loan quite typical in property investments, for property landlords, and what they will do, they have typically what they call a buy-to-let mortgage where they borrow money to purchase an investment property

and what they're paying back to the lender is the interest on the loan only. That means they have a commitment to pay back the initial amount they've borrowed at the end of the loan term, or when they sell that property. Again, obviously the lender is going to put his own risk hat on and decide whether or not that's going to be acceptable. In our personal lives,

we typically see those two options available to us when we look to purchase property, our own homes. So, let's round up, folks, what we've talked about. Should you pay off your debt early? It's going to be a classic accountant's answer. It depends on a number of variables. Those are risk, your attitude to risk, and the risk that you have in your business.

It depends on your own attitude to handling debt. Some people do not like the idea of debt. They consider it as a shackle and a restriction. Some people are more relaxed with that. They can manage the debt. They don't have too much aversion to borrowing money, and fundamentally, by the way, to will the engines of growth,

borrowing money sometimes is an excellent thing to do. Cash flow. What does it say? What does your cash flow say? That, to me, has got to be your primary point of start. Start from the cash flow, and that helps you formulate those decisions much more easily. And lastly, what's the profit impact? Now, I've made reference in this podcast to things like risk, operational.

I've talked about loans, the types you have. You'll be pleased to know that if you check out the show notes, we've got some fantastic calculators on our website, which cover things like loans. So, put a few numbers in there, figure out what type of loan you want to take, what the terms are, what the interest,

press the button, and hey bingo. It'll give you all the different options. If you want to work out how much risk is in your business, we've got a calculator there to help you. So, dive in. I hope you found the show valuable. Hope you found it useful. I'd love it if you did. Give it a thumbs up. Obviously, subscribe and share and if you thought it was good, of value, and you got something out of this, I'd love it if you left me a review.

If it's a rubbish, rotten tomatoes review. Let me know privately perhaps, but no seriously, folks, if you like the show, you've got some value from it, I'd love it if you could recommend that, share that with your friends and colleagues. Until next week, have a fantastic week ahead. We hope you enjoyed this episode and appreciate you taking the time to listen to the show.

We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.