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A Business Credit Counselor Offers Tips for Debt Management Planning


Managing Debt as a Small Business Owner: A Credit Counselor’s Tips

As a small business owner, debt can easily spiral out of control if you don’t have a plan for managing it properly. According to the SBA, almost 70% of small businesses fail because of cash flow problems resulting from poor debt management. But with some practical tips from a credit counselor, you can take control of your business debt and set your company up for sustainable growth.

Know Your Numbers

The first step is getting a clear picture of your current financial situation. Pull your business credit reports from Experian, Equifax and TransUnion to see all accounts reported in your business’s name. Make a list of all business loans, credit cards, lines of credit, and any other debt obligations you have. For each account, note the interest rate, minimum monthly payment, current balance and credit limit if applicable.

This debt overview will help you identify problem areas, such as maxed out credit cards or mounting interest fees. Tracking this information regularly can also help you spot trends and make adjustments as needed. Using a spreadsheet or financial management software makes it easy to update and monitor your debt data month-to-month.

Set a Realistic Budget

With your debt landscape in focus, you can start building a realistic budget that aligns with your revenue and covers all business expenses plus debt payments. Avoid the common mistake of basing budgets on best-case scenarios for sales. Be conservative with sales projections, and account for seasonal dips or other fluctuations.

Prioritize essential expenses like payroll, rent, utilities and inventory. Then factor in debt payments, taxes, insurance, and other regular costs. Constraints will force you to make tough choices about areas where you can cut back, such as marketing, staffing, equipment leases or other discretionary spending.

Building in a contingency reserve is also wise, so you have a cushion for unexpected costs. Even an extra 5-10% can prevent having to take on additional debt. Revisit the budget frequently, and adjust categories to reflect your actual financials.

Explore Debt Consolidation

If you have high-interest debt like credit cards spread across multiple accounts, consolidating through a debt consolidation loan can simplify payments and save on interest. This combines all balances into one new loan, with a lower fixed rate.

Be sure to shop around with multiple lenders like credit unions and online lenders for the best terms. Avoid offers that seem too good to be true, as they may have hidden fees or risks. Consider both secured and unsecured loans, comparing factors like loan amounts, rates, terms, collateral requirements and origination fees.

Run the numbers to ensure the monthly payment on a consolidation loan is affordable and achievable for your budget. While it can provide immediate interest savings, reducing balances long-term still requires discipline in paying off the loan.

Negotiate with Lenders

Another option is working directly with your current lenders to negotiate better repayment terms or rates. Being proactive shows good faith and that you take the debt seriously. Explain your situation and long-term plan for getting back on track. Then make a reasonable proposal for a modified agreement.

For example, you may request:

  • Lower interest rates
  • Extended loan terms to reduce monthly payments
  • Modified payment plans based on seasonal revenue
  • Temporarily reduced or suspended payments
  • Waived late fees

Approaching lenders with a well-thought out proposal and concrete plan shows you are committed to meeting your obligations. Having detailed financial documentation to share will also help demonstrate your situation. Be prepared to compromise, as lenders will counter with terms to protect their own interests.

Prioritize High-Interest Debt

The best strategy for tackling debt is focusing on accounts with the highest interest rates first. This is where “debt avalanching” really pays off. The faster you pay down high rate balances, the more you minimize costly interest fees.

So divert as much cash as possible each month toward credit cards, lines of credit, and other variable rate loans. Meanwhile, make minimum payments on low fixed-rate installment loans. As you pay off debts with higher rates, you can roll those payments over to the next highest interest account.

This method takes discipline, but the compounding interest savings make it well worth the focus. Tracking your progress can help keep you motivated and on track.

Use Caution With Debt Settlements

If your debt load feels completely unmanageable, debt settlement may seem like the only way out. This involves negotiating with creditors to settle account balances for less than what’s owed. While settlements do eliminate debt, they come with considerable risk and should be a last resort option only.

For starters, settlements have a major negative impact on your business credit scores that can take years to recover from. Defaulting on accounts also means facing collections calls, potential lawsuits, and asset seizures. And any forgiven debt may be taxable income.

Most concerning, debt settlement companies often fail to deliver on promises of easy fixes. Reputable firms charge hefty fees only after settling debt. But many charge illegal upfront fees, then fail to settle the accounts as advertised.

If you do pursue debt settlement, vet companies thoroughly, get agreements in writing, and consult with legal counsel. Again, all other debt repayment and consolidation options are better paths to regaining financial stability.

Lean on a Credit Counselor

If you feel overwhelmed tackling the debt on your own, don’t hesitate to seek guidance from a nonprofit credit counseling agency. Reputable credit counselors provide unbiased debt and budget advice specific to your situation.

A counselor can help analyze your financial status, identify cost-cutting opportunities, create a customized repayment plan, negotiate with creditors on your behalf, and proactively monitor your progress. They can also help organize your debt management and stay accountable to your plan.

Be sure to use an organization accredited by the NFCC or COA. Avoid any agency that pressures you to enroll in a debt management plan upfront. Make sure you understand all services, fees and terms before signing up.

The right credit counselor serves as an objective coach and advisor, not a salesman. With their support, you can take control of your debt and build the strong financial base your business needs to thrive long-term.

Make Debt Management a Priority

As a business owner, it’s easy to get caught up in sales, operations, growth plans, and fighting fires. But making debt management a consistent priority is absolutely essential to avoiding a financial crisis down the road.

Implementing even a few of these tips can get you on the right debt repayment track and strengthen your business finances:

  • Review debt balances and budget regularly
  • Explore consolidation loans or negotiate with lenders
  • Focus on highest interest debt first
  • Work with a credit counseling agency
  • Build in contingency funds

With a proactive debt management strategy in place, you can sleep better at night knowing your business is set up for sustainable success. Don’t wait until debt spirals out of control. Be proactive now in taking control of your debt situation.

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