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There’s no worse feeling than being crushed by debt of any kind. You can’t run or hide from it, but you can take steps to get it under control. If you find yourself struggling with small business debt, start with these steps to help eliminate what you owe and get your business back in good financial standing.
Before tackling business debt, you need to have a solid understanding of your current financial situation. Assess how your business budget is operating. Is it covering all the bases or operating in excess?
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 accountant to figure your budget. You can also contact nonprofit associations like the SCORE Association for free business counseling, mentoring, and online workshops on business budgeting. And you can automate the budgeting process using accounting software like QuickBooks to track 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?
Use your financial statements to help pinpoint expenses contributing to your debt. Cutting costs is a sure-fire way to increase cash flow and reduce surmounting debt load.
Transition the way you pay for business expenses until you get your debt load under control. If you continue to use a business credit line or business credit card to make purchases, you’ll continue to worry about how you’re going to pay it off later. This method will force you to only buy what you can afford to pay for in cash. Paying with cash or cash equivalents such as checks helps to eliminate procuring new business debt and prevents you from letting 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.
Whether its credit card debt or bank loans, the interest rate on each can greatly inhibit your ability to effectively pay down the principle 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 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 will start to see your debt load decline.
Simply put, the more cash you can generate, the faster you can reduce your small business debt. These are just some suggestions that may help you increase 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-restructurers negotiate with creditors and 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 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, and hopefully, you’ll have pulled yourself out of a sticky debt situation using these seven simple steps before that happens.