HOW TO MANAGE DEBTS OF A COMPANY?

Introduction

Debt management is one of the most critical aspects of running a financially sound business. Whether your company is a small enterprise or a large corporation, managing debts effectively ensures sustainability, improves creditworthiness, and strengthens investor and lender confidence. In Pakistan’s evolving economic and regulatory landscape, smart debt management is not only a strategic necessity—it’s a compliance requirement for long-term growth.

This guide explores how companies in Pakistan can efficiently manage their debts, optimize financing costs, and stay compliant with tax and legal frameworks.

What Is Debt Management?

Debt management involves strategically handling a company’s borrowings, repayment obligations, interest costs, and financial covenants. It includes:

• Assessing the company’s capacity to take on debt

• Monitoring payment schedules and loan terms

• Ensuring timely repayments

• Avoiding over-leveraging

• Negotiating better terms with creditors

Types of Company Debt in Pakistan

Short-Term Debt

Usually borrowed for working capital needs and due within 12 months. Examples include:

• Bank overdrafts

• Trade credit

• Short-term business loans

• Credit lines

Long-Term Debt

Used for capital investments and infrastructure with a repayment term exceeding one year. Examples:

• Term loans

• Bonds and sukuks

• Leasing obligations

• Long-term payables to suppliers

Secured vs. Unsecured Debt

• Secured Debt: Backed by collateral (e.g., land, inventory)

• Unsecured Debt: No collateral; higher interest due to risk

Step-by-Step Guide to Managing Company Debts

Step 1: Evaluate Current Debt Position

Start by assessing the company’s current obligations:

• Total outstanding debt (short and long term)

• Interest rates and maturity dates

• Monthly or quarterly repayment schedules

• Collateral pledged

Use key financial ratios like Debt-to-Equity Ratio, Interest Coverage Ratio, and Current Ratio to assess leverage and repayment ability.

Step 2: Create a Debt Management Plan

Based on the assessment, prepare a structured debt plan that includes:

• Prioritizing debts by interest cost and urgency

• Consolidating or refinancing where possible

• Forecasting future cash flows to align repayments

• Scheduling payments to avoid defaults

Step 3: Optimize Interest Costs

Negotiate lower interest rates or shift to less expensive financing:

• Consider Islamic financing options (Murabaha, Ijarah, etc.)

• Use commercial paper or private equity where viable

• Refinance expensive loans with favorable terms

Explore SBP concessionary financing schemes for industries like exports, SMEs, and technology.

Step 4: Monitor and Track Debt Repayments

Use accounting software or debt tracking tools to:

• Set repayment reminders

• Track interest and principal payments

• Flag overdue obligations

• Maintain lender-wise loan ledgers

This improves transparency and ensures the finance team is aligned on priorities.

Step 5: Maintain Good Relationships with Creditors

• Always communicate in advance in case of cash flow delays

• Send payment confirmations and reconciliations regularly

• Request restructuring if needed due to unforeseen circumstances

• Maintain compliance with covenants (e.g., audited statements, ratios)

A strong credit reputation helps in future funding rounds and lower costs.

Debt Management and Tax Implications in Pakistan

Interest Expense as a Deductible

Under Section 20 of the Income Tax Ordinance, 2001, interest on business loans is tax-deductible, provided:

• Loan is utilized wholly and exclusively for business

• Documentation is maintained

• Not used for personal or capital acquisition without proper treatment

Thin Capitalization Rule (Section 106)

If a foreign-controlled company borrows excessively, interest deductions may be disallowed. Companies must maintain a 30:70 debt-to-equity ratio to remain compliant.

Withholding Tax on Interest

Interest paid to non-residents may attract withholding tax under Section 152. Ensure deductions and filings are done timely to avoid penalties.

Techniques to Improve Debt Position

1. Restructure Existing Debt

Negotiate longer tenors, lower rates, or bullet payments with banks to ease liquidity pressure.

2. Convert Debt into Equity

Convert loans from directors or shareholders into equity to reduce liabilities and improve balance sheet strength.

3. Use Leasing or Islamic Finance

Consider lease-based or Shariah-compliant instruments to avoid interest burdens and retain flexibility.

4. Maintain Adequate Working Capital

Use budgeting and cash flow forecasting to ensure funds are available for repayment without affecting operations.

5. Build Credit Rating and Banking Profile

• Submit financials regularly to banks

• Avoid bounced cheques and delays

• Keep loan accounts active and healthy
  This opens access to better financing options in the future.

Key Debt Ratios Every Company Should Monitor

Regularly monitoring these ratios can signal early warning signs of over-leverage.

Legal and Regulatory Compliance

• Ensure that all loan agreements, promissory notes, and mortgages are legally vetted

• File charges on assets with SECP (where applicable) under the Companies Act, 2017

• For listed companies, report debt instruments to PSX and SECP as part of disclosure requirements

• Maintain board approvals and AGM disclosures for material borrowings

Non-compliance can lead to SECP penalties, audit objections, and legal risk.

Debt Management for Startups and SMEs

Startups and small businesses often struggle with limited access to finance and face high borrowing costs. Key strategies include:

• Keep fixed costs low

• Rely on grants, accelerators, and equity over debt

• Establish early banking relationships

• Keep accurate and up-to-date books to improve credibility

• Use government schemes like SBP’s SME Asaan Finance Scheme

Avoid unnecessary borrowings until revenue stabilizes.

When to Seek Professional Help

Consider hiring a financial advisor or CFO consultant if:

• Your debt servicing cost exceeds 25% of income

• You’re unable to negotiate effectively with lenders

• Your loan defaults are triggering legal notices

• You’re planning restructuring, acquisition, or IPO

• Your company is undergoing an FBR or SECP audit

Expert support can protect your business from financial distress.

Conclusion

Effective debt management is not about eliminating debt—it’s about using it wisely to support business growth while maintaining control and financial discipline. In Pakistan’s business environment, timely repayments, strategic planning, regulatory compliance, and open communication with lenders are essential for a company’s financial health and long-term success.

Whether you’re a startup, SME, or large corporation, managing debt proactively will keep your operations stable and your future secure.