Debt is a normal part of life. Most people carry some of it, from credit cards to car payments to a mortgage, and sooner or later a lot of small business owners carry business debt as well. Owing money is not the mark of an awful owner. Companies borrow for perfectly valid reasons, like buying inventory when the business is starting out or paying the mortgage on a retail space. You’re not in trouble because you ran a bad business. If you’re like most owners we hear from, you’re not trying to “beat the system.” You’re trying to cover payroll and not cause more headaches.
Will I be able to pay employees and vendors? Where can I get the money? Those are the questions we hear at Delancey Street, a business debt settlement company that negotiates with creditors on behalf of business owners. What you need first is a clear, practical plan to get your business out of debt without missing payroll. Payroll sits on the short list of costs that are not optional, next to business taxes and the cost of goods, so the five steps below are about clearing debt while those bills keep getting paid.
Assess Your Current Financials
Step one is to assess your current financials. Before you decide on any strategy, get a complete picture of your obligations. Knowing exactly what you owe and how it’s structured is the foundation for any effective plan. If you keep good records, the debt will be much more manageable to work through. You don’t need to be a financial expert, but you do need to have a budget for income, expenses and cash flow. Document every source of revenue, and every way money is being spent. Sometimes you’ll go over budget and sometimes under, but planning ahead lessens the impact of those surprises.
Next, look at your cash flow statement regularly. Do that and you’ll be able to spot potential trouble spots or cash flow problems early. When you’ve got visibility, you can see the leak before it becomes a flood. The statement gives you a point-in-time snapshot of what the company is earning and spending. Then list your assets and liabilities. Assets are what you own, plus any accounts receivable. Liabilities are what you owe, including loans and accounts payable.
Paying Down Debt
Once you identify how much money you owe, you can draw up a game plan to repay it. That is step two, and it calls for patience. It is tempting to set high goals and try to pay everything off at once, but that can leave you discouraged. Don’t make that mistake - accept that getting your house in order will take time, and approach your debt challenges with that mindset. Make the plan realistic and easy to follow. Look at the interest rates. The debt with the highest rate is the first debt to be paid.
Then reach out to your lenders. Attempt to negotiate a lower interest rate or, alternately, ask for a lower monthly payment. Of course, if you don’t ask, if you don’t request, you will have no hope of getting a better deal. Don’t expect too much but always ask. Negotiating can lower the debt itself or produce a more favorable payment plan, and either one takes pressure off the payroll account. At Delancey Street, this is the work we do: our senior advisors negotiate with funders and lenders for less than the full balance owed, and we don’t sell you another loan.
If you are making several payments across several loans, you may also look at small business debt consolidation, which combines existing loans into a single payment. Just know going in that your interest rate may increase, so it’s essential to understand the pros and cons before you decide.
Step three is to cut business expenses. You control the business, so start by sorting each expense into “needs” and “wants.” Payroll, business taxes, and the cost of goods are needs. Placing expenses in the “needs” category can help you focus on the items that must be paid every month for your business to continue to function. Placing costs in the “wants” category can help you see what you can cut on a short-term basis until you improve your bottom line. Advertising and travel to events might be good marketing, but you can manage without them while paying down debt. But if you can find ways to cut costs, you can free up some cash.
As for suppliers, if you’re happy with them, see if you can negotiate better rates. Otherwise, shop around for a cheaper supplier with a comparable product. Energy is another. Whether you work from a home office or a retail location, there are measures you can take to reduce your monthly electricity and heating bills. Use efficient lightbulbs, set the thermostat to a reasonable temperature, and turn off electronics when they’re not needed. Every little bit counts.
Step four is to boost revenue. When a business gets in financial trouble, it’s easy to focus on cutting costs or finding ways to increase profits. But it is also possible to focus on growing revenue, especially if your business is struggling with debt. Word of mouth can be a powerful sales tool. Encourage your current customers to bring you new ones. You can’t possibly target the whole world, but you can do something for the people who are already interacting with you. Keep them where they are if you can, then increase what they already buy.
A new product or service might also be a cost-effective way to increase sales depending on your business. But remember, the goal is to reduce your debt, so don’t take out another loan to fund the expansion. Borrowing more money to buy things is not a great idea, and it might make your debts even worse. Upselling and cross-selling are often used in the restaurant industry because it’s easy to suggest additional items. Look at your product offerings for potential upsells or cross-sells. Present the add-on alongside the original item. Make the offer seem natural.
Get Professional Help
Step five is to get professional help. This is one of the most effective ways to get your arms around your business debt. For example, a CPA can help you identify ways to maximize savings in your operations. Having a professional review your bookkeeping and payroll is always a good idea, since there could be some unnecessary spending you’re not aware of. Simply put, another pair of eyes can save you time and money.
If your debt is chewing into your payroll budget, a debt settlement company can negotiate with your lenders and funders for less than you actually owe. That is what we do. We focus on merchant cash advance debt, including stacked advances, and we also negotiate SBA loans, equipment finance and lines of credit. We are not a law firm, and when bankruptcy is the better path we refer owners to a vetted independent attorney. The first consultation is free. It is also confidential, and if a cheaper option exists, we’ll say so on the first call. Whatever you decide, keep people paid first, and work the five steps from there.
