Best Ways to Get a Small Business Out of Debt

Borrowing isn’t always a bad move for your business. It can help you finance what you need, buy more goods and expand your offerings.

Debt has a dark side too. If you don’t make your sales projections, debt can quickly spiral out of control and tear down the whole operation.

Don’t let runaway debt destroy everything you’ve worked for. Depending on how big the problem is, you may be able to fix it before it ruins your business. Here’s how to bail out early and start growing again.

Whatever you do, make sure you do it right and make a plan. Below are several ways to make it happen. Pick the ones that work for you and build your own debt relief plan.

You Need More Cash

The first step is to increase revenue. You need to pay off your debt so that means you need more cash. Raise your prices, or lower them. Upsell and cross-sell your products. Add new products or services. Small changes to prices or offerings can add up. Give discounts or a sale to earn more. Clear your accounts receivable. Follow up on customer invoices. A sale or promotion can help to bring in new customers and revenue. But don’t put too much of a discount on your products. That can hurt profit margins. Check the margins on your products or services. If they are low, it might be time to raise them. Sell off extra inventory that you’ve been holding in storage. Use what you have before you buy more. The key is that each extra dollar coming in can go toward what you owe.

Try changing prices, upselling, new products, a sale or discount. This might help bring in more customers and sales. Just don’t give out too much of a discount. That eats away at your profit margins. You might be owed money from previous sales. This can go into paying your debt too. Follow up on outstanding customer invoices and collect some revenue you’re owed. Also look at margins on your products. Are they low? Can you raise them? Sell your surplus inventory. Sell what you have already before buying anything new.

Second, you can get customers to pay you sooner. When you invoice customers for products or services that means there’s a gap between the sale and when you receive payment. For example, the customer might have 90 days to pay. The longer the terms, the longer you’ll have to wait for cash. Shorten the length of time you’ll wait to get paid. So instead of 90 days, it could be 45. Set a maximum amount of time you’ll wait to receive payment. Some customers will always take as long as possible to make a payment. Follow up on customers who are late on payments. If you absolutely cannot make it work with a customer, a collection agency can be a last resort. This service takes a fee, but you can still collect a portion of the payment.

You’ll get the cash sooner. Set a maximum timeframe that you’re willing to wait for payment. Some people always use the full amount of time to pay you back. Follow up with late-paying customers. Send reminders. If you’re really at a loss, send a collection letter. You could even hire an agency to go after the customer for payment. The agency will take a cut, but you’ll get something instead of nothing.

Third, cut your expenses. If your budget is tight, you might not think there is more to trim. But you could probably find something you think is a “need” that’s not a real need. Part of being a grownup is recognizing that not all things you call “essential” actually are, and you could do without more than you might think. Or go for many small cuts - have a few less decorations up - or one big cut, like that fleet truck you rarely use. It depends on how large your debt situation is.

Look again. What you thought you needed, may not be necessary. Many small cuts, like less decor on the walls, will save. One big cut, like ditching an under-used vehicle, will save too. Consider the size of your debt. Can small cuts do the job? Or do you need one big cut to move the needle? Here’s a bet: You don’t need that many wall decorations. Or maybe you do, but you don’t need that older truck in the back lot that you never use. Look for small items and cut them. Or cut one big one. It all adds up.

Pay Off Your Debts

Step four is to prioritize your debts. The biggest ones that can ruin you, or that you’re worried about if you don’t pay, are at the top of the list. Look at vendor relationships, interest rates, penalties, collateral, etc. If a bank can take a vehicle if you don’t pay a loan, for example, rank that loan near the top. There’s no one best ranking, balance it all. If the vendor can stop selling to you if you don’t pay, for instance, that’s a top-ranking debt. Think also which debt, if you don’t pay on time, carries the highest interest or penalties.

Most important would be a loan or balance a vendor won’t sell to you unless you pay. Rank priority debts by importance. Pay debts that could damage the business or limit it (think in-stock inventory from a vendor) first. Then look at the remaining debts. See which could do collateral damage - banks can repossess vehicles when loans go unpaid. Pay those next. Look at other factors, like interest rate or a penalty, and rank by importance. There’s no one-size-fits all for ranking. It’s a balancing act.

Step five is to make a pay off plan. Deciding to pay it down will take a plan. It’ll keep you accountable with a timeline. Make it a goal to pay off $2,000 by the end of March for instance. It all starts with how much you owe, including interest. Add it up, and pick a timeline. How long will you take to pay the debt, five years perhaps? Pick a deadline and a payoff plan. A payment date puts an end to paying on a debt. You make it to that date and it’s done. Decide on a few periodic goals to keep you motivated. Then stick to it.

Don’t just think, “I’ll start paying.” You do not want this to be the never ending story. Set a goal and timeline so you know when you’ll be debt free and can begin taking steps to reach it. Add up what you owe - including interest, then decide on a payoff time. For example, you might decide to pay off your debts in five years. Then set up a timeline for when you want to be debt free. Set periodic goals to keep you on track. At least, have a general timeline, for example, “I will pay off $2,000 of this debt by the end of March”. Keep yourself accountable. A timeline and goal will help keep you honest with yourself. Stick to your plan.

Better Terms

Step six is to try negotiating a deal with your creditors. You want to try to secure a lower interest rate, smaller minimum payments, longer schedule. Try talking to the lender to work it out. They’re already getting nothing if your business fails. Contact the creditor and you might be surprised at the deal they cut you. You may not end up with a deal, but it is worth asking for as they may agree to wait or cut how much you owe.

Ask for an extended payoff period. Tell them you are trying to get out of debt and ask if they can help. If the business fails they’ll be out of luck, anyway. The worst they can say is no, but if they aren’t getting paid anyway, a little bit of something for a few years might be better than nothing. Call up each one. See if you can work out a deal with them. You might be surprised at what they are willing to offer. They may take less than you expect.

Step seven is to borrow money from friends or family. Use it to pay off your debts and agree to pay the person who lent you the money back. Friends or family may be more understanding than a lender. They know you and your business, and may be better than a bank that doesn’t. They can let you borrow money with little to no interest. Terms may be longer and more flexible. You can make a small payment one month and a bigger payment the next. In any case, asking some of them can be worth it. If you don’t ask, you don’t know what is on the table.

Friends and family are often more flexible than lenders. They might cut you a good deal. Less interest, longer terms, small payments one month and big the next month. Your family or friends may be more patient than a bank or creditor when you miss a payment. You may not have to pay any interest. If you do, it could be lower than the rates for traditional loans.

Step eight is to consolidate your debts. One big loan pays off all the others. You don’t consolidate for the sake of having one payment. You do it because the big loan will give you better terms. Get a debt consolidation loan with less interest, longer terms or lower minimum payments. Use the loan to pay off all the others. Now you have one payment instead of many. Make sure the loan gives you a good deal or there is no point in consolidating. The loan you get should be better than the ones you are consolidating, or why bother?

The point isn’t the smaller bill to pay, it’s about better terms. You’d want a lower interest rate, longer terms or lower minimum payments. The idea of one bill instead of many is tempting but don’t be fooled by the simplicity. Pay attention to what your interest rate will be on the loan. How long will it be for and what is the minimum payment? Make sure you consolidate only when it gets you better terms.