How to dig your business out of debt
Struggling to keep your business afloat? Find out how you can dig yourself out of business debt.
After the recession of 2008, it became more difficult for small business owners to stay in the black.
Consumer spending decreased, and households found it harder to spend money on things that weren’t absolute necessities. And even then, the cheapest prices usually won consumer interest.
Fewer sales often mean less cash flow, and unless a business owner can manage their expenses down to the last penny, financial troubles begin when sales stop happening.
External funding sources may be a necessity at times to help businesses stay in operations, but little regard for the long-term consequences of borrowing money could have your company facing a daunting mountain of debt.
Cautious borrowing strategies
It’s normal for a business to need external funding at times. But just as you’d caution a private citizen, borrowing more than you need for your business, or at rates you can’t afford should be avoided at all costs.
Only seek funding through reputable companies, such as commercial bank lenders, online companies like Quick Loans, or private investors. Each source will have its own application criteria, but you need to make sure you have thought out how you will be able to repay whatever amount you borrow.
A sound strategy is only borrowing money for investments that will bring your company growth or increased revenue. A new piece of equipment to improve production or labor needs to meet seasonal demands is one way to help generate income that can both meet your borrowing contracts and boost your cash flow.
However, if you have borrowed too much over the years, you need to get control of debt if you want your company to become profitable once again.
Debt reduction strategies
Here are four strategies to help you reduce your debt.
While it may not the best solution for eliminating debt, filing bankruptcy is a common way for businesses that have run out of options to try and salvage what they can of their business.
There are several bankruptcy filing types, but it is a costly move to make. Long-term damage is done to the business credit score as well as your own personal score.
You would need to hire an experienced bankruptcy attorney to navigate the process, and between those costs and court fees, you could spending thousands to resolve your issues with debt. There are other ways that are less problematic for getting back on firm financial footing.
2) Free up cash
The first step in moving toward debt-free operations is identifying the areas of debt and hitting them hard.
There are several areas that may be contributing to your reliance on financial assistance, and working to cut costs and open up cash can put an end to this cycle.
Customers who don’t pay on time are keeping you from the cash flow needed to meet your operating expenses, so consider working with a collection agent or a more stringent collection process.
And avoid any costs that are unnecessary, such as the famous Taco Tuesday for the entire office, or a fax line that never receives faxes. Sell off used equipment or cancel the lease on the oversized copier. Streamline your expenses as much as possible in order to put money back into your pocket.
If you can relocate to a smaller, more affordable office space, it could be a wise move to help reduce long-term waste. Any cash that you can put back into your bank account can help you whittle away at the financed accounts.
3) Establish debt priorities
Examine your credit accounts and see which one has the highest interest rate. This the expense that is costing you the most money, and if it is a credit card, the interest continues to accrue until the account is paid in full.
The cash that has been freed up through your cost-cutting strategies can be used to make extra payments on your debts. In addition to prioritizing high-interest rates, consider any accounts that may be tied to personal assets as collateral. If you default on these accounts, you may be in danger of losing your home or another valuable asset that you have.
You may also be able to negotiate with your creditors for lower interest rates or pay off settlements. If you are having a hard time making a minimum payment, speaking with the lender may be able to work an option that keeps from ruining your credit.
4) Work out a new budget
If you want to get on track for better financial health, you need to reevaluate the budget. Your revenues need to exceed your fixed operating costs each month and prioritize payments for utilities and rent.
Establish your variable costs and prioritize them according to need. Whatever is left over should be spent lowering your debt levels. Once this is under control, you will have the funds available to invest in growth opportunities.
Getting out of debt can help your business succeed even when finances are tough. Adopt strong money management practices and be committed to operating your company as debt-free as possible.
Photo by Anh Nguyen