Top tips to get ahead of financial stress before it squashes your business

Cost of living pressure is squashing small businesses from every angle, so it’s more important than ever to get yourself and your business financially fit. Pure Capital co-founder, Sam Roby, explains how to manage and get ahead of your loans to prevent financial stress and bad debts scuttling your enterprise.

All of our everyday items, from the simplest grocery shop to the weekly fuel fill up for your car, and even the movement of stocks on the NASDAQ Index – these all have huge flow-on effects to the Australian consumer, especially for small business owners.

Undoubtedly as we move from a global pandemic to the highest inflation rate and towards a national recession, there’s no wonder why the cost of living is increasing. Most, if not all, small business owners have been negatively affected and this can easily flow on to your mental wellbeing as well.

In order to take back control of your financial stressors, you’ll need to be attuned to what is going on nationally with these fundamental prices, and this is what we will be doing in this short read.

Understanding why cost of living is increasing

One of the universal notions behind why the cost of living is increasing is the fact that the Consumer Price Index (CPI) has increased at an astronomical rate. Although the prices for our everyday essentials has sky-rocketed, the everyday wages and salaries in Australia haven’t increased in proportion at all.

The ABS has confirmed that prices for our everyday necessities have climbed by 6.1 per cent from this June quarter alone, which is known to be the fastest annual increase since 2001. Alongside this, Russia’s invasion of Ukraine has enforced the increase of global oil and gas prices, which also drive the prices higher for our everyday essentials such as food and fuel.

As we emerge from the restrictions from COVID-19, it’s paramount to nip your financial stresses in the bud before they snowball into a dire emergency for you and your small business.

Understanding what financial stress looks like and what to do

Multiple factors can influence financial stress. Loss of work, escalating debt, unexpected expenses, less spending money, bank accounts looking empty – to name a few – can all lead to financial stress.

If you’re struggling financially, fear and stress can take over your world. It can damage your self-esteem, make you feel flawed, and fill you with a sense of despair. When financial stress becomes overwhelming, your mind, body, and social life can pay a heavy price.

There is no simple fix when it comes to overcoming financial stress. But there are a multitude of steps you can take to limit the effects of rising living expenses.

Tips to reduce financial stress

Identify your financial stressors and make a plan on how to tackle it. Keeping to a plan can reduce anxiety and stress in the short term and keep you on top of debt, bills and other foreseeable expenses in the long term.

• Track spending
• Budget
• Pay off loans that are feasible (loans with no exit fees or penalties for making extra repayments)
• Reduce spending on unnecessary items
• Prioritise spending on necessary items and loans that can be paid off faster
• Avoid impulsive spending using credit cards
• Talk to your lenders and see if there are options available to reduce payments per week
• Consult with financial professionals

Understanding how this affects your loans and what you could be doing

New loans:

Income, credit history, equity, debts and savings are generally taken into consideration when assuming suitability for a loan, but they also look at day-to-day living expenses to decide if a loan is feasible.

Living expenses play an important role in determining your borrowing power. Living expenses in comparison to your income and other factors is a crucial aspect in acquiring a loan, and in a lender deciding how much you are able to borrow.

Groceries, utilities, transport are all day-to-day living expenses that are rising, and lenders will incorporate this into the equation they utilise to estimate an applicant’s annual living expenses.

With income not rising as fast as inflation and other living expenses, the ability to borrow becomes more difficult.

Current loans:

This can also affect current loans, as living expenses and circumstances that existed when obtaining the loan in the first place have changed due to rising costs.

Rising living expenses can affect an applicant’s ability to make current repayments on their loans. Loans that were taken out years ago would have been assessed on income vs. expenditure during that time. With living expenses rising higher and higher, ability to pay the current loans can become increasingly difficult as groceries, petrol, utilities all rise exponentially, leaving less available funds for current loans.

Reconsider what good and bad debts are

Not all debt is bad, certain types of debt can be advantageous to you depending on what it offers.

Good debt:

Borrowing money to pay for things that increase your income and wealth in the future, that would not be feasible without borrowing, would be considered ‘good’ debt.

Home loans are an example of a good debt – borrowing money to pay for a loan for a home over a long period of time. Your mortgage is giving you the ability to buy an asset class that will historically increase in value over the long term. Compounding this, every mortgage payment you make increases your equity, making it a useful tool that can be leveraged to increase wealth further.

Student loans are another major debt that would be considered a good debt, as you are investing in your future and boosting employment opportunities and earning potential. Unlike other loans, HECS has no time limit to repay and is not judged on ability to pay it back.

Business loans would also be considered a good debt in most cases, due to the ability to expand and grow, buy equipment, pay employees, increase buying and spending power, and ultimately impact the business in a positive way.

Bad debt:

Bad debt works the opposite way as it leaves you in a negative position most of the time. Using credit to buy things that don’t increase your income, wealth, future, or business capability is considered ‘bad’ debt.

Using payday loans with exorbitant interest make them very expensive options and most likely will not improve your position in the future. Credit cards are a two-edged sword – if they have a low interest rate and utilised for specific purposes to increase your spending capability, they can be perceived as a good debt; but on the contrary, when used for impulse buys, the debt can start to snowball and put you in a negative position in the future.

Seek professional help

Put simply, speaking to professionals such as financial advisors, financial brokers, accountants and any other professionals in the financial sector can be advantageous to your position.

Whether it be refinancing current assets on a lower interest rate, paying off loans quicker, identifying tax deductible options, or other avenues that can increase your overall position.

With cost of living rising in almost every aspect, obtaining financial advice that can improve your ability to pay off loans, budget, save money and improve your overall wealth is paramount and extremely advantageous, especially in today’s current economic sphere.

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