There may be no worse feeling than being in debt of any kind. That feeling is heightened when you’re dealing with business debt—your current business financial situation is untenable, and you’re facing the prospect of bankruptcy, and maybe even losing your business altogether.
You can’t run from your business debt or do nothing and hope it goes away on its own, but you can take steps to get it under control or otherwise find business debt relief. If you struggle with small business debt, we’re going to take you step-by-step through what you need to do to eliminate what you owe and get your business back in good financial standing.
But to start, let’s learn a little bit more about what business debt is, and the situations that can lead a business into debt.
Business debt is money owed by a business to a third party. Small business debt management becomes untenable when small businesses cannot afford to pay back their creditors on time and in full.
There are many reasons a business goes into debt—some of them strategic. For example, you might need a small business loan financing in order to capitalize on a new business opportunity, but your business does not generate enough revenue organically to cover the expense. So you decide to take out a loan. But then something happens, and the business opportunity ends up not working out. Now you have additional debt you need to pay off, but your business isn’t generating any additional revenue.
This happens all the time. In fact, the average U.S. small business owner had $195,000 in debt in 2016, according to a study by Experian.
Accruing debt you can’t pay off is scary, but there is hope. Below, we’ll show you how to deal with your business debt.
Some methods of small business debt management are fairly obvious, while others are more complex. We’ll give you a complete rundown of what you need to do so that you can arrange the best methods for getting your business back into the black.
Before tackling business debt, you need to have a solid understanding of your current financial situation. Assess how your business budget is operating. Where exactly is your money going, and is it the best use of your funds?
A good business budget helps to identify income sources; fixed daily, monthly, and annual costs; and accounts for all variable expenses such as rent, or other unforeseen costs.
Seek professional advice from your bookkeeper or accountant if you need help figuring out your budget. You can also contact nonprofit associations like the SCORE Association for free business counseling, mentoring, and online workshops on business budgeting. To make the process even easier, you can automate the budgeting process using accounting software like QuickBooks to track the money flowing in and out of your business.
Ultimately, assessing and reworking your budget should be the first step in forming an action plan for reaching your debt-elimination goals.
Once you take stock of your budget, take a look at your operating costs. Do you have any excess expenditures you can do without? Decide which services and operations are absolutely necessary for the daily operation of your business, and cut the rest.
Ask yourself the hard questions: Do you pay for subscriptions you rarely use? Are there professional memberships you can temporarily suspend? Could you potentially negotiate reduced prices and flat rates with certain vendors? Are you spending top dollar on advertising channels that yield very little return? Even little things can add up into substantial business debt.
Use your financial statements to help pinpoint expenses contributing to your debt. Cutting costs is a surefire way to increase cash flow and reduce your debt load.
Changing the way you cover business expenses can help you get your small business debt load under control.
If you continue to use a business line of credit or business credit card to make purchases, your debt will only increase—and you’ll continue to worry about how you’re going to pay it off. By allocating a certain amount of cash each month, as dictated by you budget, and sticking to it, you’ll only be able to buy what you can truly afford. Paying with cash or cash equivalents such as checks helps to eliminate procuring new business debt and prevents you from letting your existing debt increase.
This option might not be suitable for everyone—if you plan to restructure your debt (see below) you want to have as much cash on hand to look good to lenders. Carefully consider this method before making it a pillar of your debt elimination goals.
You can do a couple of things here to help decrease your debt load or debt interest over time.
If you can’t consolidate all your loans or you still have staggered interest rates with various lenders, establish a target debt and use the “stack method” to pay it all back. This is a type of debt schedule to help you visualize and pay off your debt.
Whether it’s credit card debt or bank loans, the interest rate on each can greatly inhibit your ability to effectively pay down the principal loan amount. This is why you should aim to pay down high-interest-rate loans first—the debt with the highest interest rate that you’ll be focusing on first is called your “target debt.” When calculated over time, paying down this “target debt” saves you and your organization more money in the long run.
To start, make a list of all of your minimum monthly payments, and make sure they are covered. Then, look at your highest-interest debt balance and determine how much above the minimum payment you can pay each month. This additional amount is sometimes called “stack repayment.”
Whether it’s $100 or $1,000, the stack payment amount should be applied on top of your minimum payment toward the highest-interest loan each pay period until that balance is paid off.
Once the first loan is paid off, apply that repayment amount to the debt with the next-highest interest. Once that second debt is paid off, take that compound amount to attack the next debt, and so on.
Of course, this method takes discipline and close monitoring, but eventually, you’ll start to see your debt load decline.
Simply put, the more cash you can generate, the faster you can reduce your small business debt. Easier said than done, we know. These are just some suggestions that may help you increase the monthly income to your business:
If your efforts to climb out of business debt on your own aren’t working, you might want to enlist the help of a professional debt-restructuring firm. Debt-restructuring firms negotiate with creditors and business debt collection agencies on your behalf to formally extend, renew, or change existing credit agreements. The process generally involves a written contract between you and the debt-restructuring company as well as the setup of automatic withdrawals from your bank account to settle outstanding debts.
These firms do charge a fee, but it’s usually a less-expensive alternative to filing for bankruptcy and will better rehabilitate your credit in the long run. If you decide to hire a professional debt-restructuring company, be honest with them on what you can afford to pay each month so that they can come up with a business debt settlement that works for both you and your creditors.
If all else fails, you still have options. For businesses that can’t manage their debt, it might be time to think about selling the business, liquidating all assets, or filing for bankruptcy. But hopefully, it doesn’t have to come to that. By using these seven tips, you should be able to reduce—and eventually eliminate—your business debt.
Meredith Wood is the founding editor of the Fundera Ledger and a GM at NerdWallet.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.
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