Dealing with Business Debt

Running a business can be tough, and sometimes you end up accruing more debt than you’d like. Don’t worry – you’re not alone. Lots of business owners find themselves in debt and are able to turn things around with some strategic planning and hard work.

Types of Business Debt

There are a few main types of debt business owners take on:

• Loans – These usually come from banks and allow you to borrow money that you pay back over time with interest. Loans can be secured (backed by collateral like real estate) or unsecured.
• Credit Cards – Putting business expenses on credit cards can be convenient but dangerous. The interest rates are high and the debt can pile up quickly.
• Lines of Credit – With a line of credit, a bank agrees to lend you money up to a set limit. You only pay interest on what you use.
• Leases – Leasing equipment like vehicles can make sense but also creates ongoing payment obligations.
• Accounts Payable – If you don’t pay vendors on time, you’ll owe accounts payable.
• Taxes – Falling behind on payroll or sales taxes will lead to tax debt.

Causes of Business Debt

How does a business end up in debt? Here are some common causes:

• Poor money management – Not tracking cash flow closely enough or overspending leads to debt.
• Growing too fast – Expanding too quickly without enough capital can be dangerous.
• Slow paying customers – Waiting 60+ days for customers to pay invoices can create a cash crunch.
• Unexpected expenses – Emergencies like equipment repairs or lawsuits can hit hard if you lack reserves.
• Industry downturns – When business slows in your sector it’s easy to fall behind.
• Overvaluing inventory – Having too much unsold inventory eats up working capital.
• Personal use – Using business funds for non-business purposes creates obligations.

Consequences of Too Much Debt

Carrying excessive debt has serious consequences, including:

• High interest payments – Money goes to pay interest rather than growing the business.
• Bankruptcy – If debt overwhelms revenue, bankruptcy can wipe you out.
• No access to capital – Banks won’t lend to those already overloaded with debt.
• Stress – Debt is a huge source of worry and hurts productivity.
• Supply chain issues – Vendors stop extending credit as unpaid bills pile up.
• Tax penalties – The IRS assesses penalties and interest on late tax payments.
• Legal action – Creditors can sue over unpaid debts and push you into bankruptcy.

Tips for Digging Out of Business Debt

If you’re burdened with business debt, here are some tips to turn things around:

• Increase revenue – Finding ways to boost sales/income should be priority number one. Offer discounts or new services to bring in cash quickly.
• Reduce expenses – Cut discretionary spending to the bone. Look for other areas like payroll or inventory to reduce.
• Restructure/consolidate debt – Work with lenders to extend terms or lower interest rates. Consider debt consolidation.
• Use personal funds – Inject your own savings if possible, but be cautious about mixing personal and business funds.
• Communicate with creditors – Being upfront about the situation can help negotiate better terms. Don’t wait until you default.
• Consider bankruptcy – Chapter 7 liquidation or a Chapter 11 reorganization could provide relief as a last resort if the debt load is unsustainable.
• Bring in investors – Finding business partners or selling equity could generate much-needed cash.
• Improve processes – Work smarter not harder. Look for ways to streamline operations and reduce waste.
• Let customers pay late – Temporarily allowing slower payment can keep revenue coming in and prevent alienating customers.

Legal Protections

Fortunately, there are some legal protections available that may help if your business is facing excessive debt:

• Limited liability – Your personal assets are usually protected from business debts and lawsuits. Creditors can’t seize your home or personal bank accounts for business obligations.
• Chapter 11 bankruptcy – This allows you to restructure and modify debt obligations to manageable levels under court supervision. Many businesses emerge and thrive again after Chapter 11.
• State wage laws – These prevent creditors from garnishing more than 25% of your wages in most states if they win a lawsuit against your business.
• Solvent schemes of arrangement – These can bind creditors to a debt restructuring plan approved by 75% vote under Part 5.1 of Australia’s Corporations Act 2001.
• Voluntary administration – An independent administrator takes over to assess options and creditors cannot take enforcement action during this period in Australia.
• Company voluntary arrangements – CVAs allow renegotiation of unsecured debt under Part 1 of the UK’s Insolvency Act 1986.

When to Seek Help

Don’t wait until it’s too late to seek help digging out of business debt. Consult with both a business turnaround expert and an attorney experienced with debt relief options once you:

• Are using debt to pay routine expenses
• Have creditors threatening legal action
• Are forced to delay tax payments
• Need to tap personal funds or retirement savings
• Find debt preventing growth opportunities
• Feel constant stress and dread about the situation

The Bottom Line

Having some debt is usually inevitable when running a business, but too much can put you on the path to failure. With early intervention, creative strategies, and legal protections, many entrepreneurs pull through tough spots and go on to prosper. The key is being proactive, communicating with creditors, and utilizing all available options. Don’t let pride or fear of stigma keep you from seeking help when you need it.