Business Debt Relief: Complete Guide for Small Business Owners

Business debt is not always a bad thing. A responsible owner of a cash-starved business can borrow funds to buy more inventory or expand what the business has to offer.

But if sales fall short of projections, debt can spiral out of control and destroy a business. That is a far easier trap to fall into than most owners realize. What starts as one small loan from a local bank or a credit card can quickly grow into a tangle of obligations that eats up all the cash the business generates.

Unmanageable debt can be the final blow to a struggling business. Often that debt is an emergency only because the business owner delayed dealing with it. Delay or inaction will only make it worse. This guide explains how to get out of debt while there is still time.

Seven Ways to Get Out of Debt

When small-business debt turns into a trap, owners typically start looking for ways out. Below are seven ways to get out of debt. Use them to build your own plan for relief.

The first step to getting out of debt is to increase revenue. The more money you earn, the more you can pay off each month. Consider every option you have. Raising prices may work, or maybe you can earn more by offering discounts to attract customers. Upsell and cross-sell customers every chance you get. Add a new product or service, at least temporarily, to lure more customers or earn repeat sales. Collect on customers who owe you money. Start by checking your margins. It may be possible to raise prices on some of the lower-margin items. Also, sell any surplus inventory you have stockpiled. A sale can lure more customers. But too much discounting can eat your gains.

Rethinking your pricing can lead to some quick gains in margin. Figure out which of your products are sold at a loss and figure out if you can raise prices or lower expenses, and then follow through. Another option is to sell the inventory you already have in the shop, then take the money to pay down the debt. A promotion is another option, but be careful, as cutting prices too deep can do long-term damage to your margins, and it can easily backfire.

The second step toward getting out of debt is getting paid faster. Many businesses run on invoices, but that means there is a gap between a sale and the moment the money arrives. You can try to ease that crunch by shortening your terms, as in going from 90 days to 45. Customers will take the terms you give them. Set a point beyond which you will not wait to get paid and stick to it. Call or email as soon as a bill is overdue. You can also outsource debt collection. There are a number of debt-collection firms that will handle the process for you, which takes a weight off your shoulders. The downside is, it will cost you. They usually take a share of every dollar they collect.

Shortening your billing terms is a good way to manage cash flow because customers tend to take every day you allow them, which means the sooner you bring money in, the better off you are. If a term is 90 days, that could mean three months before money comes in, and so many things can go wrong. Shorten it to 45 days, and your wait is cut in half. When a bill goes unpaid, send a reminder, then follow up with a letter. If that does not work, then a collection agency is an option. A collection service does take a share of each payment, but what they bring you can still be better than a loss.

The third step is cutting expenses. Some shop owners assume that they already are as lean as they can be. Think again, and think hard. Consider how many things you buy that are not really necessary. Do you really need fresh flowers to greet customers? Do you really need that truck that gets used only a few times a year? Look for things you can cut by a little, or by a lot. Many little cuts add up to something, and taking one big cut can make a difference. Figure out what you can let go and get it done.

Small expenses like adding extra decorations that do not attract more customers may not feel like much, but they add up over time. Big expenses like a fleet truck that sits in the shop most days can add up quickly. Cutting a little here and there is the easiest option, but sometimes it makes sense to cut deep at once, and a few times it is even worth doing both. Every dollar you can free up can go toward paying down debt, which makes getting aggressive about expenses vital.

The fourth step toward getting out of debt is deciding which debts to pay first. Weigh each one carefully, and figure out which debts are actively making things worse. Vendor relationships are important, but so is staying current with the bank. Anything with collateral behind it, like a vehicle, can be repossessed. And some debts come with large penalties that can add up quickly. Debts that come with high interest or expensive penalties or which may be damaging relationships with vital vendors are good starting points.

No formula will tell you which debts to pay first. It is about balancing the factors and making the judgment. Unpaid vendors may stop selling to you if they are unpaid for too long, and a bank can take a vehicle that was used as collateral if you default. Loans that come with penalties and high interest also can cost you quickly. The order you follow is never set in stone, but watching for these common risks is a way to avoid letting the debt spread through the business and take it over.

The fifth step is to make a repayment plan with a timeline. That holds you accountable, and the deadline keeps you pushing to meet the goals. Put goals on a calendar, then do everything you can to hit them. Start by totaling up what you owe with the interest, then pick a horizon like five years and set a deadline. That gives you the number to reach. Then set specific targets, like $2,000 by the end of March. Once you know your target, work backward to set your goals for each period until you reach the present day and get to work. And stick to it.

Something about setting a goal on a calendar and giving yourself a deadline holds many people accountable in a way they would not be otherwise. A good repayment plan is about specifics. A plan to tackle debt is not just about motivation. Once the goals are set, they can be used to measure progress. Take the interest into account and figure out how much you owe, then set yourself a horizon like five years. Next, decide how much to pay down by the end of every month and write it on your calendar. Do not let yourself forget. Even if you have reduced expenses and raised revenue, they will not help if you let the repayment drag on forever.

The sixth step toward easing the burden of your business debt is to negotiate with creditors. If your business fails, they get nothing, so it may pay them to help you. By calling them, you may be able to negotiate lower rates, smaller minimum payments and longer schedules. They may even offer you more than you expected to get, simply by the nature of this phone call.

Some will offer to lower your rates, or the minimum payment, or they may give you a little more time to pay. You may have to call them to ask, but in some cases, they offer you options on their own. The only way to know what options are on the table is to ask.

The seventh step toward easing the burden of your debt is to borrow money from friends or family to pay debts. Bank loans can be a burden, but most people are more forgiving when it comes to the people they know. A family member or friend may be able to lend you funds on better terms than you could get from a bank. Flexible terms can mean smaller interest rates or longer repayment windows. Maybe the interest is low or none at all. One way to make sure you do not strain your personal relationship is to work out an agreement in advance and put it in writing.

Friends may agree to give you low interest, longer terms, and even allow you to make a small payment one month and a larger one the next, depending on your revenue. It is rarely a perfect option, but it is good in a jam. But always repay them. There are few things worse than damaging a relationship with someone close to you.

Debt Consolidation

In extreme cases, businesses have taken on new debt to get out of old debt. The truth is, that is not always a mistake, and in fact, it can work. Debt consolidation is the process of taking all your debts and turning them into one large debt by taking out one big loan to pay off all the smaller ones. That does make life easier on the surface, but that alone does not make it worthwhile. The real point is to score terms that are better than you were on before. So do not just take the first loan offer that comes along. Shop around until you find a deal with lower interest rates, longer repayment times and smaller minimum monthly payments. Those will make the process worth it.

The terms of every loan and credit card you have are unique, and they all add up to the mountain of debt that is weighing you down. It can be a huge relief to go from several debts to one, but it is not necessarily a relief unless the terms are better than the terms of the ones you had before. Take the time to consider if it is really worth it before you sign.