Balancing Business Debt Payments and Operating Expenses

Running a business can be tricky when it comes to managing your finances. You want to pay off your debts and cover your operating costs, but also have money left over to grow your business. It can feel like a juggling act to balance it all. This article will break down some tips on how to effectively manage your business debt payments and operating expenses.

Understand Your Current Financial Situation

First, you need to understand where your business currently stands financially. Make a list of all your debts, including the principal amount owed, interest rates, and monthly payments. Also list out all your regular operating expenses like payroll, rent, utilities, etc. This will give you a clear picture of your total monthly financial obligations.

Next, look at your income and cash flow. How much money is your business bringing in each month? How much of that is profit after covering the operating expenses? Knowing your cash flow will help determine how much room you have to pay down debts vs investing back into the business.

Prioritize High Interest Debt

Once you know how much wiggle room you have, prioritize paying down high interest debt first. This is debt like credit cards or short-term loans that often have double-digit interest rates. The higher the interest, the more these debts are costing you over the long run. Pay down the high cost debt aggressively to free up cash flow.[5]

Make at least the minimum payments on all debts, then put any extra funds towards the highest interest debt. Once that’s paid off, move to the next highest and so on. This “debt avalanche” method saves you the most on interest payments over time.

Explore Refinancing Options

If you have business loans or lines of credit with high interest rates, look into refinancing to a lower rate. This can instantly reduce your monthly payments and free up cash flow. Shop around with various lenders to see if you can get approved for a refinance at lower rates.

You may also be able to consolidate multiple high interest debts into one lower rate loan. This can simplify payments and make it easier to pay off.[4]

Negotiate Extended Payment Terms

For large fixed expenses like equipment leases or business loans, try negotiating extended payment terms to free up short-term cash flow. For example, see if you can get a 12-month lease extended to 18 months to lower the monthly payments. Or get a business loan term extended from 5 to 7 years.

This lowers the monthly payment amount, though you will pay more interest over the life of the loan. It can provide temporary relief on cash flow until business picks up again.

Review Operating Expenses

Take a hard look at your operating expenses to find areas to cut costs. Go through your expenses line-by-line and ask if each one is absolutely necessary or if there’s room to cut back.

Some areas to look at are office space, equipment costs, vendors, payroll, inventory, subscriptions, etc. Even small cuts in operating expenses can add up to big savings over time.

Manage Accounts Receivable

Don’t let unpaid customer invoices hurt your cash flow. Stay on top of accounts receivable by sending out invoices promptly and following up on past due amounts. Offer incentives for early payment such as discounts for paying within 10 days.

Consider using collection services or legal action for very late payments. Managing receivables better improves cash flow to help cover your financial obligations.

Use Excess Cash Strategically

When you’ve paid down debts and have excess cash flow, use it strategically. First build up an emergency fund with 3-6 months of operating expenses. This provides a buffer in case of an unexpected downturn.

Next, invest back into your business by improving operations, hiring talent, purchasing equipment, etc. Smart investments can lead to growth and higher profits down the road.

Lastly, consider prepaying debt principal when possible to pay loans off faster and reduce interest costs. Use excess cash intentionally to better your finances.

Tap Into Financing Strategically

When used strategically, debt can provide funding to grow your business. Only take on new financing for assets that will improve productivity, expand capacity, or boost sales.

For example, a small manufacturer might take out an equipment loan to buy a new high-tech machine that will double production. The increased revenue from higher production can fund repayment of the loan principal and interest.

Only borrow what you can conservatively project your cash flow can support. And shop around for the best rates and terms on any new financing.

Manage Personal vs. Business Finances

As a small business owner, it can be tempting to intermingle personal and business finances – using company revenue to pay yourself or cover household expenses. Avoid this as much as possible to keep your business finances clear.

Have a separate business checking account and credit cards solely for your company. Take a consistent salary to cover living expenses. Keep your personal and business money separate to better track the true cash flow and health of your business.

Use Accounting Software

Using small business accounting software can make it much easier to manage your finances all in one place. The software can track income, expenses, account balances, payments due, and other key financial data.

Many programs also let you generate financial reports like profit and loss, cash flow, and balance sheets in just a few clicks. This gives you up-to-date visibility into where your business stands.

Work With a Financial Advisor

If you are struggling to manage your business finances effectively, don’t be afraid to ask for help. Hiring a financial advisor or accountant to review your business finances can provide an objective outside perspective.

They may spot issues you’ve overlooked or have advice on how to better structure your finances. Having an expert assist you can be well worth the investment.

Make Debt Payments On Time

This may sound obvious, but make sure you always pay your business debts and expenses by the due date. Even one late payment can result in fees and penalties that add to your costs. It can also hurt your business credit score, which may impact your ability to get approved for financing in the future.

Mark all payment due dates on your calendar and set up reminders to avoid accidental late payments. Automate payments when possible as well.

Review Finances Frequently

Don’t just set your finances on autopilot. Schedule time every month to review your financial reports in detail. Look for areas that are over or under budget, payment due dates coming up, changes in cash flow, etc.

Frequent reviews let you course correct quickly if issues arise. You can also spot positive trends, like expenses decreasing or revenue growing, faster.

Build an Emergency Fund

Having an emergency fund provides a vital cash buffer when unexpected issues arise. Try to build up 3-6 months of operating expenses in a separate emergency savings account. This gives you funds to tap if you face a large unexpected expense.

It also helps tide you over if you have a period of lower sales. Don’t let a single emergency expense throw off all your careful financial planning.

Consider Debt Consolidation

If you have a lot of high interest debt scattered across multiple credit cards or loans, debt consolidation can help streamline your payments. This involves combining all your debts into a single new loan with a lower interest rate.

You then make one monthly payment on the consolidation loan rather than multiple payments. This can reduce your total monthly payment and also lower your total interest costs over time.

Communicate with Lenders

If you do fall behind on business debt payments, communicate openly with your lenders before defaulting. Many will be willing to work with you to modify payment plans or restructure debt to avoid default.

Being transparent about cash flow issues and showing a commitment to repaying can go a long way in building goodwill and negotiating alternate payment arrangements until your finances improve.

Know When to Seek Help

Don’t be afraid to seek outside help if your debt payments start severely impacting cash flow. A business credit counselor can help negotiate better rates and terms with lenders to reduce payments. In extreme cases, legal or bankruptcy experts can assist with more significant restructuring.

The key is being proactive and seeking help early before the situation spirals out of control. Know when it makes sense to bring in reinforcements.

Review Insurance Coverage

Carrying proper insurance helps minimize unexpected costs from events like accidents, natural disasters, lawsuits and more. Review your policies annually and adjust coverage to account for changes in your business and industry.

Important policies include general liability, professional liability, property/casualty, and directors and officers (D&O) among others. Don’t cut insurance to save money without fully understanding your risks.

Consider Leasing Equipment

Leasing certain equipment rather than purchasing outright can help conserve cash flow, especially for equipment that will become obsolete quickly. With a lease, you just make monthly payments for use of the equipment rather than buying it.

Leasing also shifts the risk of equipment breakdowns and repairs to the lessor. Evaluate lease options for any expensive new equipment your business needs.

Offer Early Payment Discounts

To improve incoming cash flow, offer customers a small discount such as 2% off for paying invoices early. This provides incentive for customers to pay you faster.

You can make up the small discount you give by having faster access to the cash and improved cash flow management. Just make sure you model the impact on your profit margins first.

Consider Payment Plans for Taxes

If you are struggling to pay a large business tax bill all at once, the IRS and many states allow payment plans to pay over time. This avoids draining your accounts or needing debt to cover taxes.

Payment plans do charge interest and fees, so a loan may provide lower costs long-term. But payment plans give you more time to pay and help manage cash flow issues.

Have a Monthly Budget

Create a detailed monthly budget mapping all expected income vs expenses, debt payments, payroll, taxes, etc. This allows you to plan cash flow needs in advance and see where you may have shortfalls.

If the budget shows more outgoing cash than incoming, you can proactively make adjustments to rebalance cash flow before issues arise. Regularly review and update the budget.

Take Advantage of Tax Deductions

Take full advantage of all tax deductions available to your business to reduce your tax liability. Interest paid on business loans and debt is generally tax deductible. Other deductible expenses include salaries, office rent, utilities, supplies, etc.

Review your accounts with a tax professional annually to identify all potential write-offs and minimize your tax burden. Every dollar saved on taxes is one you can allocate elsewhere.

Consider Downsizing

If your business has grown bloated or you are struggling to cover operating costs, consider downsizing to a smaller office space, fewer staff, reduced inventory, or scaling back services. This reduces your fixed overhead costs and can get expenses back in line with revenue.

Look at areas where you can cut excess without severely impacting operations. For example, move to a smaller office, cut back on unused software subscriptions, reduce inventory that doesn’t sell quickly, delay new hires, etc.

While downsizing can be difficult, it is sometimes necessary to reduce operating costs and free up cash flow to get the business back on stable footing. Approach cuts strategically and communicate openly with staff.

Renegotiate Contracts and Leases

Look for opportunities to renegotiate major contracts and leases to improve terms and lower payments. For example, you may be able to negotiate lower rent with your landlord, improved payment terms with suppliers, or lower service costs with vendors.

Be transparent about cash flow issues and ask for concessions to reduce costs until business rebounds. Offer incentives like signing a longer lease or paying upfront if you get lower monthly rates. Even small savings per contract add up.

Reduce Inventory and Storage Costs

Carrying excess inventory ties up cash unnecessarily in storing and managing that stock. Look for ways to reduce inventory levels through better supply chain management.

Negotiate just-in-time delivery of materials to reduce storage needs. Use up existing inventory before ordering more. Sell off slow-moving items at a discount. Reducing excess inventory improves cash flow.

Delay New Hires

When cash is tight, delay hiring for open positions if possible and take on the work yourself in the interim. Or consider temporary workers rather than full-time employees.

See if current staff can absorb extra duties, at least temporarily. Bringing on new permanent staff commits you to ongoing payroll and benefits costs that may strain cash flow.

Suspend Bonuses and Raises

When trying to cut costs, temporarily suspending discretionary expenses like employee bonuses, raises, and non-essential travel can help. Reassure staff this is temporary until business conditions improve.

Protecting payroll should be priority, so focus cuts on discretionary payouts. But be selective and thoughtful about cuts to maintain employee morale.

Reduce Owner Compensation

If you pay yourself a salary as owner, consider temporarily reducing it to decrease costs. Lead by example in belt tightening. You can take more compensation when the business is healthier.

Also suspend shareholder distributions or dividend payments to owners if applicable. Preserving cash within the business should take priority.

Seek Payment Extensions or Modifications

If certain debt payments are unmanageable in the short term, proactively contact lenders and suppliers to request extended payment terms, reduced interest rates, or other modifications until business conditions improve.

Most will work with customers in good standing who reach out before defaulting. Temporary concessions can ease the burden when you’re facing a crunch.

Consider Payment Plans for Taxes

If you are struggling to pay a large business tax bill all at once, the IRS and many states allow payment plans to pay over time. This avoids draining your accounts or needing debt to cover taxes.

Payment plans do charge interest and fees, so a loan may provide lower costs long-term. But payment plans give you more time to pay and help manage cash flow issues.

Take Advantage of Tax Deductions

Take full advantage of all tax deductions available to your business to reduce your tax liability. Interest paid on business loans and debt is generally tax deductible. Other deductible expenses include salaries, office rent, utilities, supplies, etc.

Review your accounts with a tax professional annually to identify all potential write-offs and minimize your tax burden. Every dollar saved on taxes is one you can allocate elsewhere.

Consider Consulting Services

If you are struggling to get a handle on your finances, consider hiring an outside financial consultant. They can conduct an in-depth analysis of your business’s finances and provide specific recommendations to improve cash flow and debt management.

While consultants cost money up front, their expertise may uncover cost savings and improvements that more than justify the expense over time.