Managing Debt as a Small Business Owner: Strategies for Success

Managing Debt as a Small Business Owner

Businesses, like individuals, can incur and suffer from excessive debt. While it’s not viable for a company to be completely debt-free, business leaders need to be strategic about when and how much debt to take on.

Studies show that roughly half of all small businesses fail within their first five years of operations. Among the several reasons for the failure rate include a lack of funding, disadvantageous credit arrangements, and uncontrolled debt.

Business loans make sense for most firms when it is necessary to boost cash flow or finance developments or expansions. However, the last few years have been especially challenging for small enterprises that financially overextended themselves due to the COVID-19 recession. Many borrowed too much without being able to repay what they owed.

In these situations, a small business owner has two options for dealing with debt: try to salvage the business while seeking to settle outstanding responsibilities or allow the business to fail while implementing an exit strategy that minimizes financial penalties.

8 Strategies to Help You Manage Your Debt

Investing one’s personal pockets into the firm is the first solution for most struggling entrepreneurs trying to save their company while managing its debt. It’s a calculated risk that, while it can be successful, isn’t immune to backfiring. You should only consider it if you can ensure that it’s a short-term strategy with a long-term payout.

Fortunately, it isn’t the only way to keep your company afloat. Here are a few strategies you can follow to help you manage your debt before it dominates you:

1. Rethink your company’s budget

Before you address your company’s debt, uncover everything you can about your present financial standing. Often, business owners take this step after falling behind on monthly payments. Examine your previous financial plan and adjust your budget to offer yourself more leeway.

Your company’s budget should detail your sources of income, variable spending, and fixed costs. Including a cash flow budget to account for planned transactions other than profit and loss, such as loan repayments, tax responsibilities, and owner returns, is also a good idea.

A budget should assist you in developing the beneficial habit of setting aside money to pay suppliers, creditors, your landlord, taxation authority, and other predictable obligations. Moreover, your accountant or business adviser can provide professional guidance to help you fine-tune your budget.

2. Examine and prioritize your debts

The next stage in dealing with any problem is to raise awareness about it. Thus, before applying debt management measures, go over all of your company’s liabilities, which may include:

  • Taxes
  • Overdrafts or bank loans
  • Any commercial credit cards, as well as the interest rates and required monthly payments
  • Lease commitments or contracts
  • Staff-related liabilities such as wages, pensions, healthcare expenses, and employee benefits

After you’ve examined your liabilities, you may start ranking them. Which responsibilities carry the harshest penalties for late payment? For example, failing to make payroll can jeopardize the entire personnel. It would help to prioritize those in these circumstances.

3. Establish a strategic debt repayment plan

A debt payment strategy will not solve all your problems—for example, the requirement to manage total debt accumulation. However, it will save you money in interest. Here are two popular techniques for paying off debt faster:

· Debt avalanche

The debt avalanche technique involves making additional payments to higher-interest debts while making minimum payments on all other obligations. Many financial advisors recommend this strategy if you want to save on your interest payments.

· Debt snowball

The debt snowball strategy entails addressing the smaller obligations first. Once those are paid off, keep paying the same amount toward the larger obligations. The benefit of this strategy is that it can help you build motivation and momentum to clear your debts by achieving small wins.

Both approaches have benefits and drawbacks. The debt avalanche won’t work if you aren’t consistent, while the debt snowball still exposes you to severe interest rates from other loans.

If you’re not sure which debt repayment method to use or how much extra payments your company can afford to make, don’t hesitate to consult an expert. Consider outsourcing debt management chores to an accounting team or, if necessary, bring in an independent consultant to get your company back on track.

4. Increase your cash flow to pay off your debts

Being in debt is not a desirable situation. As a result, paying off debt should be a top priority for the majority of firms. Below are a few ideas for increasing your income flow to pay off debt:

· Improve overall productivity

Boosting the efficiency of your employees and business processes or finding new ways to create more money can be effective tactics for increasing cash flow.

You may consider holding training sessions to help enhance your staff’s skillset or introduce new technologies to enable employees to accomplish their assignments much faster.

More savvy marketing strategies can also make a huge difference. While this might heighten costs in the short term, a relevant and effective marketing strategy can improve revenue, which you can use to repay your debt in the long run.

· Optimize inventory turnover

If you don’t manage your inventory well, it can easily deplete your financial reserves. It’s why you should carefully supervise it. Ensure that all your company expenses moving forward are only for absolutely critical items or if there’s an unexpected demand. If possible, choose suppliers providing return rights for unused and unsold products.

· Discuss more agreeable terms with merchants

A beneficial account payable management can considerably increase your company’s cash flow and speed up debt repayment.

Many vendors offer payment terms of one to three months after delivering their services or products. In contrast, you may be able to negotiate a discount for early payment, which can sometimes be as significant as 10 percent. Finally, you may end your contract and work with suppliers who offer more affordable rates.

5. Evaluate loan terms and consider refinancing

Because interest rates are at record lows, now is an excellent time to check your loans and ensure you’re getting a decent deal. The savings you can make through this route may be substantial.

Refinancing will also allow you to restructure debt in a variety of ways, such as merging multiple loans into one that’s more manageable, modifying loan lengths, or optimizing debt tax deductibility.

Of course, pursuing these avenues is easier before internal problems emerge because a profitable business with a good credit history will encounter less friction when working with vendors. Even if things aren’t going so well, it’s still a good idea to communicate with the company’s financiers on a regular basis to see what assistance may be arranged.

6. Reduce your expenses

If you have considerable business debt, you are most likely spending on things your operations require. However, if you have a significant amount of debt and cannot recover, you may be able to limit your expenditure even further.

When times are tight, you must carefully consider what you truly need. Look for any areas of your budget where you may save money. Even what you believe are necessities may not be so when assessed more closely.

There are two methods for reducing corporate expenses. One is to make a few tiny cuts, such as reducing energy-hungry equipment and devices. The other is to make a single major one, such as moving to a smaller, cheaper business space. Depending on how much debt you have, both might be viable for you.

7. Seek assistance from friends and relatives.

While it may not be ideal, seeking help from family and close friends may allow you to pay off your business debt more quickly. They may be willing to settle your bills, and you can repay them sans the huge interest rates.

Additionally, obtaining a loan from a friend or family member can be advantageous. They are frequently more understanding and eager to collaborate with you than a standard creditor.

As mentioned above, a relative or friend may charge you a low-interest rate, if any at all. They may also allow you to pay smaller sums over a longer period. Furthermore, friends and family members may agree to allow you to modify your payment amount and schedule as needed. You may be able to make a little payment one month and a larger payment the next.

8. File for bankruptcy

As a last resort, you can file for business bankruptcy, handing over the company to a trustee who will sell its assets, pursue any outstanding accounts receivable, pay unpaid taxes, and distribute any remaining monies to creditors.

Chapter 7 bankruptcy discharges you of any personally guaranteed business debts. This will allow you to move on from a failed firm. However, note that your credit rating will suffer for seven years because of this action.

Wrapping Up

It’s highly common for entrepreneurs to be concerned about their finances, so remember that you are not alone. What’s important is that you take action. Do everything you can to keep your company afloat, and check with as many local financial organizations as possible to explore assistance options they may provide.

Francis Nwokike

Francis Nwokike is a Social Entrepreneur and an experienced Disaster Manager. I love discussing new business trends and marketing tips. I share ideas and tips that will help you grow your business.

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