If a company’s sales drop but its bills stay the same, that can be a recipe for disaster. The past few years have been hard on small businesses. Revenue slows, expenses run higher than usual, inflation pushes up costs. You suddenly find that your cash flows have taken a hit. Many businesses can become so preoccupied with managing their day-to-day affairs, that there is no time or energy to devote to addressing their financial problems. This “deer in the headlights” approach can have disastrous results. If your business can’t afford its debt payments, you have more options than it may feel like. The reality is that the longer you wait, the fewer options you have to address the problem.
Start with the Numbers
Start with the numbers. What it all comes down to is a firm understanding of your current cash flow situation. If your bookkeeping is current, pull your profit and loss statement and your accounts receivable aging report. From the P&L, you can get a clear idea of your income, bills and overhead costs. If your accounts are up to date, you can see how much is coming in and how much is going out. The A/R report tells you exactly which bills or invoices have not yet been collected. If the books are behind, hire a bookkeeper to get everything into your accounting software, or at least pull your business bank and credit card statements. You can’t hit your target if you don’t have a clear picture of where you are.
Then do the same for what you owe. For each debt, write down how much you borrowed, the interest rate, how much you owe now, whether payments come out daily, weekly or monthly, how long you have left to pay, any collateral or UCC filing, and any personal guarantee. Debts with a personal guarantee may be the most urgent, because your personal assets are on the line if you default. Check your business credit reports for UCC filings, which show whether a lender has filed a notice of a security interest in business property. Once you know how much cash is coming in, how much is going out, and what you owe, your path to get out of this hole will start to emerge.
Fix Your Cash Flow
To fix your cash flow, you need to either increase the cash coming in or reduce the cash going out. Cut variable expenses, renegotiate supplier contracts or find cheaper ones, collect invoices faster by offering a discount for quick payment, raise prices, or drop products and services that don’t earn their keep. Even a tiny reduction in cash outflow every day can be a huge boost to cash flow in the short term. The goal is keeping your business afloat, so getting creative when it comes to overhead costs is totally valid.
A line of credit or invoice factoring can help if the shortfall really is temporary. Be cautious, though: if your cash flow situation is severely out of whack, getting more credit may simply put you behind the 8-ball that much farther.
Talk to your vendors and suppliers to see if they can work with you on payment terms. Most business owners already know they have a good relationship with their suppliers but don’t realize that their suppliers can come through for them in tough times. They want to keep your business, and may agree to defer payments or accept reduced ones for a while. Before you agree, ask whether partial payments will show up as late on your business credit reports, and whether you’ll have trouble buying on credit from that vendor later.
Once you’ve managed to get ahead on those vendors, the next step is to look at your lease obligations. Ask whether the lease can be renegotiated or, if you can’t afford to stay, what ending it would cost. At the end of the day, a landlord has their own bills to pay and cash flow needs. If the space would be hard to rent to someone else, your landlord probably would prefer to meet in the middle than see you fail and be out the rent checks.
For business credit cards, look for low-cost balance transfer offers. Check the “Offers and Promotions” tab or call the issuer for a balance transfer offer or consider opening a new card. A 0% intro APR card can buy you time but the interest rate is often quite a bit higher after the 0% rate ends. Making minimum payments can keep you going through a tight cash flow period, but know the interest rate. Also, only use credit cards for essentials. High balances reporting to the card owner’s personal credit can drag down credit scores. Missing a minimum payment will result in a late fee and interest, and the business card’s interest rate could jump to the default rate immediately.
Then you look for cash outside the business. There may be opportunities for a new loan or refinancing, but the viability of those options depends heavily on your current financial situation. If you can refinance or consolidate, start with the debts carrying the highest rates or the most onerous payments, such as daily ones. If you do refinance or consolidate but don’t fix your underlying cash flow issues, you’ll only be digging yourself in deeper.
As soon as you realize you may not be able to make the payments on a specific loan or financing, call the lender and talk it out with someone. Keep in mind, your lender doesn’t necessarily want your business to fail. They may be able to restructure the loan or accept lower payments for a period of time. It’s an uncomfortable conversation, but ignoring the problem is far worse. If you have an SBA COVID-19 EIDL loan, ask about a hardship accommodation.
Loyal customers can sometimes help through crowdfunding, and most kinds don’t require good credit. It takes real marketing effort, and you’ll likely need to offer something of value. In a reward campaign, supporters send money with the expectation of receiving a reward, such as a product or service in exchange. Investment crowdfunding offers equity instead.
There are also nonprofit credit counseling agencies (search for an NFCC member) that can take a look at the situation and perhaps come up with a modified payment plan on personal credit cards. That can help if you’re self-employed and have run business expenses through personal cards.
Debt Settlement
If you fall behind, your debts may eventually be turned over to a collection agency. At that point, you may be able to negotiate a reduced payoff. Debt settlement is a process of settling for less than the full amount you owe. The downside is that late fees and interest keep accumulating, plus you can be sued by creditors. And there’s no guarantee that each creditor will agree to a settlement. Some businesses start negotiating and need to file bankruptcy before the process is over. Debt settlement can work for some business owners who can’t pay off the debt in full and where bankruptcy is not a good option.
And don’t hesitate to talk with a bankruptcy attorney if the issue becomes serious. You don’t have to file, but a Chapter 11 or 13 can allow the business to continue operating and pay its debts in smaller, more manageable chunks. Chapter 7 is useful for businesses that can’t continue, and want to close up shop and avoid a drawn-out legal fight over unpaid debts. The attorney can walk you through whether business assets can be seized, whether personal assets like your home are at risk, and what your options are if you’re sued for nonpayment. It helps to think of a bankruptcy attorney as someone who will give you honest advice about your best options. You don’t have to take their advice, but you should hear it.
When debt and bills start to pile up, consider all your options and start taking immediate steps. The sooner you address the issue, the more options will still be open.
