Kristen Herhold October 18, 2021 Taking on business debt isn’t the end of the world. In fact, there are a lot of good, strategic reasons for your business to take on debt. That said, carrying business debt for a long period of time can cut into your cash flow, and put a damper on reinvestment and innovation— not to mention cutting into things like retirement savings.
So how do you get your business out of debt? Looking at your total debt number might be intimidating — the average small business is carrying around $ 195,000 in debt — but it can be paid down and paid off if you approach it with positive thoughts, discipline, and, most importantly, a detailed, comprehensive plan.
Tally it up — all of it
The first step in getting your business out of debt is to determine exactly how much debt your business is in.
Most business owners have a rough idea of how much debt they’re carrying, but a surprising number don’t know the exact figure. Now’s the time to figure it out. Compile a complete list of all your debts; each entry on the list should include the name of the creditor, the interest rate you’re paying, the total amount you owe, and the minimum payment due.
You’ll probably feel some dread as you total up all your debts, but once you have everything written down at your fingertips, you’ll probably realize it isn’t nearly as bad as you’d feared.
Come up with a new budget
Now that you know how much debt you have, it’s time to figure out where your money is going.
Start by going over your last year’s worth of financial statements. Look at your sources of revenue and your expenses. What patterns do you see? Are some revenue streams declining? Are certain expenses increasing over time? What were the biggest unforeseen costs you had to deal with, and how can you better prepare for them?
Once you have an idea of your revenues and obligations, it’s time to come up with an actionable budget. At this point, you can seek the professional help of an accountant or bookkeeper, use a budgeting app, or turn to popular software such as QuickBooks.
Put careful thought into your budget. A sustainable, sensible budget will help you make steady progress toward eliminating your debt; an unrealistic or sloppy one will only hold you back.
Assess your expenses
Now that you know exactly how much money is going out the door each month, you’re going to want to get that number down as much as possible.
When you’re looking over your financial statements, it can be helpful to divide your expenses into three categories:
- Essential: These are necessary expenses that you must pay — rent, utilities, and taxes would fall into this category. There’s not much you can do to reduce these expenses, unless you’re willing to forfeit your office space in favor of remote work and virtual meetings.
- Negotiable: Expenses in this category are necessary but could potentially be negotiated or cut down. A lot of expenses are going to fall into this category — everything from employee benefits, to professional memberships that you could downgrade or suspend, to marketing and advertising budgets, to insurance policies. You might also try to negotiate better rates for certain contractor or vendor services.
- Expendable: These are the expenses you can safely cut. This could include unused subscriptions, services that aren’t giving you a good return on your money, or, if times are really tough, underperforming employees you can replace by recruiting more entry-level employees in college towns. And don’t overlook small, recurring expenses, especially ones that are automatically charged — if you cut enough of them, they can add up to substantial savings.
Go all-cash
Paying with all cash can reboot your relationship with money and break some of the habits that may have gotten you into debt in the first place.
If using a business credit card or a line of credit is what got you into debt, continuing to draw on that credit is only going to be counterproductive. Consider paying your now-streamlined monthly expenses in cash — this will keep you from racking up more debt, and research has shown that people spend less if they pay in cash rather than credit. Cash is real, tangible money, and when it leaves your hands, you viscerally feel it in a way that you don’t when you swipe a credit card.
No matter how much you’ve already pruned your expenses, a month or two of paying in cash will likely highlight more fat you can trim.
Make agreements with your creditors and lenders
The people and institutions you owe money to want to be repaid, not to punish you. It’s in your mutual interest to make it easier for you to pay them back — especially if it’s a choice between paying your debt off or bankruptcy.
Start by trying to lower your interest rates. If you’re carrying a lot of credit card debt, you’re not alone — one recent survey found that 45% of Americans have taken on more credit card debt since the beginning of the pandemic. Consider transferring your credit card balances onto a single card — many balance transfer cards offer a low or zero percent interest rate for a period of time.
Next, look at your bank loans and personal loans. If you’re a customer in good standing, your loan manager may lower your interest rate if you explain your situation. (Just keep in mind that you want to lower your highest interest rates first — that’s usually credit card debt.)
You could also apply for a hardship plan that further lowers your interest rate and gives you more time to pay, although creditors may ask for documented proof that you’re undergoing financial hardship.
In the end, it’s in everyone’s interest to avoid defaults. On your side, a default will mar your business credit and could lead to collections or even a seizure of your business assets, depending on your agreements. And on their end, they’ll be taking a big loss that could’ve been avoided.
Increase revenue
One simple (and obvious) way to chip away at your debt is to simply bring in more money. This could mean increasing sales through social media, collecting payments from customers ahead of schedule, raising prices, and lowering prices (to drive sales).
Analyze your cash flow and target the most lucrative revenue streams first. Increasing a large revenue stream by 10% is better than doubling a tiny revenue stream.
Come up with a repayment plan using the “stack/target debt” method
Experts suggest you target your debts with the highest interest rates first, since those are the ones that are growing the fastest.
Using the stack method, you make minimum payments on all your debts while allocating as much money as possible each month toward your debt with the highest interest. Once that debt is knocked out, you take that amount of money (minimum payment plus however much you can add) and apply it to the debt with the second-highest interest rate. Once that’s gone, you roll over that amount to the next debt on the last, and so on.
Use a debt-restructuring firm
These companies will essentially manage your debt repayment for you, communicating and negotiating with your creditors and scheduling payments out of your accounts. They’re a great choice if you’re too busy running your business to tackle your debt or if you just don’t have a nose for numbers. Keep in mind, however, that they do charge a substantial fee for their services.
Getting your business out of debt is possible
No matter how your business got into debt, whether through a deal gone wrong or COVID-related money loss, it’s possible to get out of it and on the road to a profit.
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