Is your small business debt putting your company’s future at risk? At some point in the past you decided to take on business debt to get additional capital to expand your operations, purchase assets or pay off outstanding bills. This might have been via a small business loan, Merchant Cash Advance, credit cards or other financial option. Since more than 80% of all small businesses carry some level of debt, you are definitely not alone in this. Your small business debt is like any other expense in that it needs to be budgeted and serviced from your company’s profits. As such there are steps you can take to reduce this debt to free up more capital for future business investment and growth.
Here a six steps that you can follow to reduce your small business debt to increase your profitability and capital. Implementing them will require discipline, dedication and some hard choices.
1 – What Is Your Business Currently Spending and Why?
It all starts with a detailed understanding of what your business is spending and why. You have to know where your money is going and be able to justify it. Make a detailed list of your small business debt expenses, classify as either fixed vs variable, organize by amount and prioritize by importance (critical, necessary, or luxury),
Whatever the reasons for spending in the past, now is the time to reevaluate everything. Circumstances and your business priorities likely have changed and now is the time for a major reset. When your business is in debt, you need to take steps to cut back on anything that is not necessary for your daily business operations.
2 – Update Your Budget To Include Your Small Business Debt Payments
Your business budget is your management financial guide. You should update it to reflect your new business changes, revenue streams and spending priorities. Based on these changes, determine how much money can be dedicated to paying down your small business debt. Remember, your debt payments are an expense and need to be in your revised budget. If it is on paper, it is more likely that you will be disciplined in servicing your business debt rather than paying “when available”. There is ALWAYS something a small business owner can justify to spend money on. Avoid this temptation. It requires discipline.
3 – Review and Adjust Your Small Business Debt Payment Priorities
If your business has more than one debt creditor, you should review the priority and scheduling of payments to reduce your overall debt costs due to interest rates and late penalties. Since you now have budgeted monthly debt payment expenses, you need to determine how quickly your business can reduce its debt burden, to free up that future capital savings.
If your business has one or more small business loans, normally these are at fixed interest rates, plus any penalties for late payments. You will need to review whether there are any penalties for earlier or additional payments and whether they are applied to the loan principal, reducing your total interest costs. For multiple business loans, you can prioritize payments by what is most important to you. For example, you may choose to pay off the smallest loans to just have one loan remaining, independent of interest rates. This will help improve your credit score sooner as loans are marked “Paid”. Alternatively you may choose to pay off the loan with the highest interest rate first, then focus on the other loans. Whatever your payment strategy, you will need to make minimum payments to all loans to remain current and avoid late payment fees.
If your business uses one or more credit cards for payments and have outstanding balances, these will invariably have higher interest rates than your small business loans. In a similar approach, you can focus on paying off the credit card with the smallest outstanding balance, eliminating interest costs sooner. Unlike a small business loan, completely paying off your credit card, has less of a positive effect on your credit score, since it simply results in your account being marked “Current”. Again, you will need to make minimum payments to all credit cards to remain current.
4 – Consolidate Your Debts To Lower Your Total Interest Costs
As mentioned your small business debt likely has at least two or more debt creditors. Whether a small business loan and/or credit cards, you may be able to secure a business consolidation loan at a lower interest rate, resulting in lower total debt service costs. This offers you the convenience of one monthly payment, with less likelihood of a missed payment. You should take into consideration the ‘fees” of the financial lender for originating the consolidation loan and whether earlier or higher payments will be applied to the outstanding principal, reducing your debt service costs even further.
Alternatively you can also consider opening an introductory, low rate APR credit card and transferring your other credit cards debts to it. Normally the credit card introductory period is 12-18 months, which may be sufficient time to reduce your business debt expenses. This alternative requires greater discipline by the business owner to avoid adding additional purchases to the consolidation credit card, defeating the whole purpose of reducing your business debt burden.
5 – Renegotiate With Your Debt Creditors
You small business debt normally has two types of debt creditors. Short-term (one time or easily substitutable) versus long-term (recurring and difficult to substitute) relationships. Both debt creditors want to be paid, but the importance they place in the value of the relationship with your business is likely different. The more important you and your debt creditor value the relationship, the more likelihood of reaching a “deal” that works for both of you. It may be time when you need to negotiate with your debt creditors about alternative payment schemes.
Start with call or personal visit to your debt creditor where you explain your business situation to see if your business can work out some type of alternative payment scheme. This might be extending the term of the business loan to lower your monthly payments, reducing the interest rate or negotiating a final settlement where you pay less than what you owe to walk away clean. You will be surprised to see how creative a debt creditor can be when faced with the alternative of a debt default, since it is bad for all parties involved. In this case a bad agreement may be better than no agreement being reached.
6 – Keep Your Business Going
Debt is a normal aspect of managing a small business. You need to be disciplined and prudent in reducing your business debt expenses, but your business needs to continue to move forward and, not be static until “better times” happen. Focus on your business goals, take calculated risks to take advantage of new opportunities to increase your revenue and profitability.
Small Business Debt -Conclusion
There are a variety of steps you should consider to help reduce your small business debt to increase profitability and capital. You need to reevaluate the how and why your business has reached a high debt level. You need to identify, budget, prioritize and commit to your business debt reduction plan. In some instances your business might need debt consolidation or renegotiation (debt forgiveness) with your debt creditors.
Please call us at (888) 213-3383 to help review which financial product best serves your business needs or Contact Us via Email.