How to Eliminate Small Business Debt in 7 Simple Steps

Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

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.

1. Assess and rework your budget.

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.

2. Reduce expenses.

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.

3. Temporarily pay with cash (if you can).

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.

4. Communicate with creditors and lenders.

You can do a couple of things here to help decrease your debt load or debt interest over time.

  • Investigate the opportunity to lower interest rates. It’s possible to get some of your interest rates lowered. For credit card debt, this is primarily done by transferring existing balances to credit cards with a lower interest rate. For bank loans, you should call your loan manager and discuss options. If you’ve made regular payments and your business is in good financial standing, an argument can be made to lower your rates. However, chances are the interest rates for your bank loans are not the highest rates you pay. Try to work on lowering the highest interest rates first.
  • Consolidate your loans. It’s possible to do this. Consolidating your loans into one payment lets you reduce monthly costs without harming your credit. The best-case scenario is consolidating several shorter-term loans into one long-term package. This will greatly ease your repayment load and help keep you from going under.
  • Apply for a hardship plan. Find out if you qualify for a “hardship plan” that includes a lower interest rate and payment extension. Creditors typically require a hardship letter that explains your current financial situation and provides proof that you require assistance to meet your debt obligations. This includes tax returns, financial statements, and more.

5. Create a “target debt” or “stack” repayment plan.

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.

6. Increase your income. 

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:

  • Diversify. Can you add an additional product or service to your current offering? Are you reaching all potential customers through targeted marketing? Are there an untapped niche audiences you haven’t considered?
  • Raise your prices. But just enough to maintain the same amount of sales. Be sure to communicate to existing customers before you raise prices, and ask if they’d like to order anything before the change is in effect. This could result in a much needed bump in revenue anyway.
  • …Or lower them. Offer mark-downs on merchandise and discounts on services, especially for loyal and repeat clients in an effort to boost sales. Just make sure not to slash the prices too much that you won’t make up lost cost with increased sales.
  • Get what you’re owed. Ramp up accounts receivables by following up on late payments from customers. You can even present your clients with discounts or rewards for paying fees upfront.
  • Upsell. Is there a way to sell more to your existing customers? Can you offer any incentives or bundle your existing products or services in a way that would entice people to buy more from you? A quick email with a flash sale, a limited offer, or subscriber-only deals could do wonders to increase your monthly revenue.
  • Optimize inventory. If you have inventory that isn’t selling, see if you can adjust your purchasing habits or look for suppliers that will offer rights of return for unsold goods. This will free up both physical space and room for more inventory that might actually sell and increase revenue.
  • Sell your surplus. Look at the things you don’t use—or don’t use to their full advantage—and sell them to people who might. Can you sell unused furniture or equipment on Craigslist? Is there another business that could buy a portion of your company you no longer are passionate about? Note that you should never sell anything you’ve put up for collateral on existing debt. That’s straight-up fraud and could have serious legal ramifications.
  • Get scrappy. What else can you do to make quick buck? Can you lease out a portion of your office to another business? Could you save on rent by working remotely? Get creative by generating additional revenue from your existing assets.

7. Hire a debt-restructuring firm.

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.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

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