Businesses, like individuals, sometimes suffer from too much debt. Taking on the right amount of debt – and at the right time – can mean the difference between a business that struggles and one that succeeds. According to the U.S. Small Business Administration (SBA), roughly 50 percent of small businesses fail within their first five years, largely because of insufficient capital, poor credit arrangements and too much debt.
For most businesses, borrowing makes sense when it is necessary to bolster cash flow or finance growth or expansion. Yet, due to the Great Recession, the last few years have been particularly difficult for small businesses that overextended themselves by borrowing too much money without the capacity to make back what they owe.
Would some of these ailing companies have been better able to avoid onerous debt by making sounder borrowing decisions early on? Possibly. Nonetheless, once creditors are at the door, it’s too late to perform a retroactive financial analysis. In these cases, a small business owner has two ways to deal with debt: try to save the business while attempting to settle outstanding accounts, or allow the business to fail, but with an exit strategy that minimizes the financial consequences.
Save the Business
Obviously, the first option in trying to save a business while managing its debt is taking money out of your own pocket and putting it into your business. This is a calculated risk that probably has failed as many times as it has succeeded, and should only be done if you can justify it as a short-term tactic that promises the likelihood of a long-term payoff.
Cut Costs
If you cannot bail out your business with private funds, you need to identify areas where you can reduce costs. Perhaps you can sublease unused space or sell off unused equipment. While shrinking your workforce is not an attractive option, it may be necessary to keep your business alive.
Contact Customers and Suppliers
Stay connected with your customers, and seek out ways to increase your exposure and/or improve your business model, and thus your revenue. Offer your best customers markdowns if they can pay you quicker. You should also contact your suppliers to arrange discounts and/or deferred payments.
Contact Creditors
Contact every creditor, and advise them of your predicament. Ignoring your lenders can only make matters worse, while tackling a debt problem is easier when you act early. Since it’s in everyone’s interest to find a solution, request that your lenders work with you to lower interest rates, increase your credit line or restructure your repayment options.
If dealing with multiple creditors or collection agencies is taking you away from the more important task of running your business, you can outsource your debt problems to a professional debt-relief company. A reputable firm can negotiate with your creditors on your behalf to settle debts for less than what is owed.
Consolidate Loans
You can consolidate your business loans into one payment, which may reduce monthly costs without negatively affecting your credit. A business debt consolidation loan can allow you to deal with a single creditor, rather than many, and perhaps get a loan with a lower interest rate. The process can be facilitated by a debt consolidation company hired to take responsibility for negotiating the new loan, collecting payments from your business, and paying off your previous creditors. The loan may be unsecured or secured with business assets.
