With lenders tightening the reins on borrowers and prices for everything from materials to health care on the rise, many small-business owners are straining under the weight of growing debt.
Certainly, bankruptcy is one route small-business owners can take to salvage their companies, but such a move comes at a steep price. Then there’s also the long-term damage that bankruptcy causes to both the business and the owner’s personal credit scores.
To avoid a similar fate, here are some ways small businesses can dig out of debt without filing for bankruptcy:
Cut unnecessary costs and free up cash
Identify the parts of the business that got the company into debt in the first place and attack them head on. If customers aren’t paying on time or your expenses are too high, consider ramping up collections efforts and ditching unnecessary expenses such as office space or costly phone systems. Another way to free up cash: Sell off unused equipment or scrap.
Revisit the budget
If the debt keeps piling up, then it probably means the company’s current budget isn’t really working out. Create a budget based on the business’s current financial situation. Make sure your business’s revenues can more than cover your fixed monthly costs like rent and utility bills. Then, allot a portion of the budget for variable costs, such as manufacturing materials. Business owners should devote much of what’s left to paying down their debts. If you have credit-card debt, for example, make sure you pay off more than just the minimum. Otherwise, your debt will keep building and it’ll take years to pay off. An inexpensive way to help you keep track of your budget is to use accounting software like Intuit’s QuickBooks or Quicken or Xero.
Prioritize debt payments
Tackle the business’s highest-interest rate debt first. Most likely that will mean concentrating your energies on paying down credit cards. However, if you’ve personally guaranteed any of your business’s debt–meaning, if a creditor or supplier can come after your personal assets if you default–make sure paying off those debts become a high priority as well.
Speak with creditors
“Tell your creditors the financial situation you’re in and the hardship the business is going through. Then, ask if they have a hardship plan that may provide better payment terms. If the creditor doesn’t offer one, request a payment plan or a reduced settlement amount. Make it clear–without being demanding–that the less they’re willing to accept or the more they’re willing to reduce your debt, the faster you will pay them. Just make sure you can fulfill your end of the bargain. The worst thing a business owner can do is set up a repayment plan with a creditor and default.
Consolidate your loans
Consolidating your loans into one payment allows you to reduce monthly costs without harming your credit. The best-case scenario is consolidating several shorter-term loans into one long-term package.
Negotiating with creditors can be a harrowing experience. If creditors are unwilling to work with you, enlist the help of a credit counseling organization. While these nonprofit organizations typically offer debt-management help only to consumers. But for more complicated business debt issues we recommend seeking a bankruptcy attorney’s advice.