Debt can help a business grow. The trouble starts when the debt payments increase to the point that they eat up your net income. At that point, you need to focus on how to reduce your debt payments so you can regain control of your business cash flow.
There is no single number that tells you how much debt is too much, but there are warning signs. If you’ve had to miss a debt payment or borrow money to cover it, that’s a red flag. If your business credit score has fallen or lenders are offering you fewer options, that’s another. When those signs show up, you need to get a better handle on your business debt.
Check Your Financial Statements
To figure out how well you are doing at managing debt, you need to check your financial statements. If you don’t have a budget, create one now. Use the last few months of your bank and credit card statements, and a full year of data is best. Then add up your income and expenses and figure out your net cash flow (income minus expenses). Look for expenses that have crept up or revenue that is slipping. Just the act of adding up your expenses will save you some dollars already because you’ll realize what you could and should be doing without.
Many expenses run on autopilot. Sort them into three groups. The first is continue: Expenses you must pay no matter what, such as taxes. The second is negotiate: Expenses that you need but could be reduced, such as insurance or employee benefits. The third is cut: things you don’t actually need or that cost too much. Now take each expense and put it into one of those categories. Obviously, my advice is to cut as many expenses as possible, but in the real world, that’s easier said than done. Be realistic about what you can and can’t achieve. Some cuts, like letting an employee go, will hurt but may be necessary. Any cut that adds cash flow helps you make debt payments, but don’t feel you have to cut everything in one month. Annual memberships and subscriptions can renew automatically unless you cancel ahead of time. They probably run on autopilot too, so see what you can cut. These kinds of expenses are easy to miss, but they add up over time and take a bite out of your profit margin.
Then work on bringing in more money, which means selling more, not selling at a discount. Your budget will show which revenue is the most profitable, and you should spend more effort to bring in that revenue. You could also increase prices on your most popular products or services. Or try attracting new customers. Make sure you have a system in place to collect payments from customers. Offering a discount for prompt payment can beat chasing invoices for months. But as your expenses decrease and your revenue increases, you’ll notice your net cash flow rising. You may even start to have a surplus. You can then begin to pay down your business debt, which will, in turn, reduce your business debt payments.
Complete Your Own Debt List
Next, look hard at the debt itself. Complete your own debt list. It should include each debt’s type, balance, payment amount, interest rate and fees, and repayment schedule (daily, weekly or monthly). Check your business credit reports so you don’t miss anything. When you compare that list to your list of expenses, you may find that the amount of your debt payments, plus expenses, are eating up all of your net cash flow and then some. Organize your list by type of debt, interest rate, and/or due date. When you figure out which payments are due soonest, you can schedule them to fit your cash flow. Paying the highest-rate debt first often makes sense, but a lower-rate debt with harsh terms can be more urgent.
Remember that refinancing or consolidating your debts doesn’t mean that they go away. But it can lower your monthly payment, as long as your new loan is cheaper, or has better terms, than the loans you’re rolling over. Refinancing a variable-rate loan into a fixed-rate loan can also protect you from future rate hikes. Consolidating also reduces the number of payments you need to make. It is worth taking a few minutes to calculate the interest you will pay if you keep the current loan versus refinancing or consolidating. In either case, the loan you take out has to fit the needs of the business. A short-term refinance or consolidation might ease your immediate cash flow, but be very careful. Don’t take on another high-cost loan to pay off one you can’t keep up with. Doing that piles interest on top of interest.
Now negotiate. Start with a phone call. Turn to the long-term vendors for help. Some may extend your payment terms from net-30 days to net-90 days. Others may offer you a 2% to 10% discount if you pay early. Call any lender or creditor you’re struggling to pay as early as you can. The worst thing you can do is ignore the problem. The lender might be able to offer lower payments, or even more time to pay. Let them know you can’t make the payment, but that you don’t want to default and you want to get it right. Explain the business’s circumstances, and give them a new, realistic payment plan. If you miss payments but don’t contact your creditors, they may send the account to collections or file a lawsuit. In some cases, you may have given them the right to seize your business assets, even money in your business bank accounts.
If a creditor agrees to change your payments, get the new plan in writing, and make the payments as promised. Did you sign a personal guarantee on the debt? With most small business credit cards, you have to. If you did sign, a late payment on the balance might have a negative impact on your personal credit score. The creditor could also come after you personally for the balance. Late payments, collections and tax liens can also land on your business credit reports, which lenders will see. Monitor your business credit so you catch problems early.
If the debt has become unaffordable even after renegotiation, you may want to consider a debt settlement. Instead of paying the entire amount owed on a loan or the full credit card balance, you negotiate a reduced amount the creditor will accept. Selling business assets is another option.
People can become emotionally attached to their businesses, and all the debt problems can create a lot of anxiety. A business coach or mentor can help you sort out the situation. You can find free or low-cost assistance through programs such as Small Business Development Centers (SBDC), SCORE, Women’s Business Centers or Veterans Business Outreach Centers. You may also want to ask an accountant or financial counselor to review your books and tell you what you can and can’t do. And in some cases a third party can identify blind spots or gaps that cost you money. Some companies specialize in helping businesses restructure debt. If you use a debt relief company, do your research first and read the contract carefully. An experienced bankruptcy attorney can help you restructure your debt.
At the most basic level, it comes down to managing your business expenses to afford your debt payments and, as needed, finding ways to pay down those debts. A business that can’t pay faces late fees, collections, lawsuits or seized assets, so the time to act is before that happens. Getting control of your business debt payments will also give you back control of your cash flow, making it easier to keep the business afloat. It’s easier to plan for the future when you have cash flow, and you will have that again once you have control of the debt situation.
