If you’re paying daily, chances are you’re making the payments through the business’s bank account, and you know the deal. Every day your payment leaves your bank account. This can create a lot of cash flow issues, especially if your business doesn’t bring in much money. Every day you take something out of your business bank account, your business loses flexibility.
Business debt isn’t always bad. Businesses borrow money in order to grow, as well as fund operations and other activities. There’s a time and place for business debt. As long as you’re able to make your payments without jeopardizing your business’s cash flow, it can work for you. Business debt is bad when you can’t control it. The red flags look much the same: late payments, debt to cover debt, declining business credit scores, UCC filings piling up, lenders saying ‘no.’ If that sounds familiar, here is how to bring those daily payments down.
Make a Budget
Start with a clear picture of where the money goes. Many business owners don’t have a firm understanding of how much they make and how much they spend, but you can’t make big changes unless you know where you stand. Make a budget if you don’t already have one, pulling from the past few months’ bank and credit card records. A year’s worth is better, if you have it. You can see how much of your income is going to your credit cards, loans, and other monthly expenses by looking at your business bank account. Read through every line item of your business’s income and expenses. See where expenses have crept up or revenue has trended down. If you serve multiple customers or have different revenue sources, categorize the income to see which segments are the most lucrative.
When you see cash flow issues, look at each and every expense to see if there is anything you can cut. So go through every line item, and sort them into categories: continue, negotiate, or eliminate. On the payroll tax front, yes, that’s still a tax you’ve got to pay, so it stays. Insurance, employee benefits, some contractors go in the negotiate category, the ones you can shop for or simply ask to lower the price. Small businesses often can operate more efficiently by doing away with distractions like subscriptions and memberships for unnecessary services and software. And notice subscriptions that only come once a year, because they renew on their own unless you cancel ahead of time. Some reductions, such as cutting staff, hurt, but they may be essential to keep the business running.
Then look at the money coming in. Increasing sales is the normal response to falling income, and it doesn’t have to involve discounting. Your budget will identify which revenue is most profitable, and that’s where you should put your extra energy. Think of the money you’ve got coming in from overdue invoices as a savings account you can go to in an emergency. Go collect it. For some businesses, offering a discount for prompt payment is more effective than pursuing customers for weeks or months for the money.
Refinancing or Consolidating
Now itemize the business’s debt: what type, balance, payment amount, interest rate and fees, and whether the debt is repaid daily, weekly or monthly. This will give you a general idea of where you stand financially. Also check the business credit reports, which show what lenders can see, and might reveal something unexpected. Remember that not all debt is created equal, so you need to strategize about it. It’s usually best to tackle the highest interest rate first, but a lower-rate debt with stiffer terms, such as a daily deduction, could be the more pressing one.
Refinancing or consolidating changes the terms under which you owe the money. It doesn’t erase the debt. A refinance means that you replace one loan with another, and consolidation works much the same way: you take on one big loan and use it to pay off multiple debts. Once you have your loan, you have one payment to make. If the new debt costs less or has better terms than the existing debt – for example, a lower-rate line of credit or term loan – you may be able to reduce your payments. If you keep paying the same amount instead, a lower rate means more of each payment goes to principal than to interest, which means you’ll pay off your debt faster. Even if your payment doesn’t fall, converting variable-rate debt to fixed-rate debt can shield you from rising interest rates.
However, what you don’t want to do is rush out and borrow more at higher interest rates to service a debt you can’t afford, because then you’re just piling interest on top of interest. That can trap you in a cycle of debt, and it is not a solution; it only delays the inevitable. If an expensive new loan is your only way to avoid default, move on to the next step.
Make Contact
Once you have a firm understanding of your finances, it is time to make contact. Make a call and explain that you are having financial difficulty and need to reduce your payments. Give an estimate for how much you can afford to pay. You may need more time to pay off what you owe, so ask for it. Never put off making calls to your creditors. If there is a problem, you need to contact them as soon as you find out about it. If you go silent and miss payments, creditors could send your account to a collections agency or sue the business. In some instances, a default allows them to seize assets such as the cash in your business checking account. Get the agreement in writing. Make sure they send you a letter or email describing what you have agreed to. Does the loan come with a personal guarantee? Many small business credit cards do. You could be held personally liable, and your personal credit could suffer if payments are missed.
Your suppliers can help too. Some vendors will move the payment deadline from net-30 to net-90. That doesn’t mean the vendor is forgiving you anything; it just means you have 60 extra days to pay. Others may give you a 2% to 10% discount for paying the bill early. Late payments, collection accounts and tax liens can all appear on your business credit reports. Keep an eye on them.
Studies have shown that people who are under financial pressure may be more likely to make unwise choices, so seek guidance from a third party. You can get free or low-cost mentoring from a variety of sources, including Small Business Development Centers, SCORE, Women’s Business Centers and Veterans Business Outreach Centers. Some firms specialize in helping companies restructure debt. If you’re considering this option, look into the company thoroughly, and read the contract carefully before signing. If they won’t answer your questions, move on. If all else fails, a bankruptcy lawyer can walk you through your options.
Waiting rarely helps. When a business defaults, the balance may be accelerated, meaning the loan becomes due in full. To make matters worse, businesses can get even more debt when they incur late payment penalties and other fees. From there, the debt may be sent to collections, you may be sued and, if you signed a personal guarantee, your own assets may be at risk. Every business will experience financial hardships from time to time. What sets a business apart is how well it responds to the situation. The sooner you act, the more options you will have.
