Best Ways to Reduce Business Debt Payments Without Defaulting

If you run a small business you know the feeling of doing what you can to boost revenues when there is a slowdown. Typically, you do whatever you can to get more sales back to a target, hoping to restore profit levels. But this time it’s different. This slump has no precedent. The old playbook of chasing more sales may not be enough this time.

Sometimes what’s easier is not pumping sales up - but cutting debt and freeing up your cash for other things. Often overlooked, it should be a first stop in cutting costs and driving profit. The long term gains are great.

As you’re slashing the company’s debt, be sure to do the same for yourself. Many times your personal debt-to-income ratio affects your ability to get capital. Uncertainties on paying off your personal debts may make others wonder about the health of your business.

Attack Your Existing Debt

For starters, take a hard look at your balance sheet. While “debt” might carry a stigma, not all debt is bad. For example, if you own your office space, that debt can be good debt (assuming you own the underlying asset with potential to increase in value and/or provide tax benefits). Mark those debts. Next, turn your attention to the other debts and look for red flags. As you’re reviewing the balance sheet, flag any unsecured revolving credit (credit cards).

Small businesses tend to lean on credit cards to cover any gaps in cash flow. Make a list of the liabilities according to their monthly payment and interest rate. Pay off the highest rate first. Then work down the list.

While you’re getting down debt, getting new debt can be a good thing if it can help get your cash flow and profit to the right place. Many small businesses applied for, and received the SBA EIDL loan in 2020 for COVID-19 assistance. The first year of the loan was interest-free, so in some cases the businesses paid off other debt before interest had to be repaid.

Even while you’re getting debt down, don’t forget to watch credit usage. There are many tools to watch your credit. CreditKarma.com shows the credit usage versus credit available. Aim under 9 percent of usage. Keeping a low usage of your available credit tends to earn a stronger personal rating from the credit reporting agencies, which also plays into your ability to gain access to money for your business.

When you do look for new money, lenders are marketing hard, competing on all channels. Do the due diligence, then invest time into the relationship. A community credit union may be able to offer services similar to those offered at a big bank, while providing a more personalized relationship. They can share their insights on restructuring.

Renegotiate existing debt. A downturn in the economy can work out in the favor of the debtor. Lenders are more willing to work with borrowers by restructuring payments or resetting rates in line with the federal rate guidance. Lenders may have created programs for current economic conditions, so ask them what they are offering.

Look into grants, not just loans. Economic development groups often fund firms that add workers that help the local economy. Indiana’s Next Level Job Program, for example, pays employers up to $100,000 for training workers in high-demand skills with approved certification. Grants also tend to come with conditions. But grants can provide valuable funding or offset debt.

Debt need not be the crushing weight it is often feared to be. It simply needs guardrails to keep it in service of your goals and nothing more. Used well, it’s a tool to a better bottom line. Follow these steps and debt can serve you.