Smart Debt management in business success

Debt management is not only the name of managing the debt or the timetable of repayment of the debt. Debt management is one of the most effective ways to ensure that the company or organization has the funds in their accounts for the enhancement of the business at any point of the accounting year.

Management of debt for the generation of cash for further investments of business can create higher gearing ratios for the business. In this case, the existing or potential investors will be uncertain about the growth of the business, and it is highly probable that it will cause problems in generating cash from right issue in the future. However, effective debt management can save a lot of money spent in the process of right issue.

Debt is cheaper than the equity of the business. Therefore, smart debt management can save precious money of the business. Moreover, interest paid on the loan is an allowable tax deduction in most countries. Productive debt management also reduces the taxable income of the business in a legal and effective way.

Injecting a lot of finance via debt financing in the business can create problems for the business at the stock listing. When the business is having a higher gearing ratio, it is assumed that the business is not capable of offering right issue or even the investors are not interested in buying the shares. Another negative signal that can be assumed by the investors is that the business is not declaring dividends on regular basis or lower level of dividends. Therefore, in these circumstances, debt management must be effective and must maintain a good and acceptable gearing ratio.

Debt can be converted into shares after the time of maturity. In effective Debt management, there is always an option for the debt provider of converting the debt into the share of the business at the time of maturity or after a few years. At the same time, if the debt provider feels that he/she is gaining more worth in converting the debt into equity then he/she may proceed.

Effective debt management can be used to show the equity holders that the business has a lot of investment opportunities, and they cannot afford the right issues expense. This action of management can create excitement in the market and when the management decides to issue the shares, they can make more money from the existing shareholders. Therefore, debt management can be used for the successful right issue of the business as well.