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Steps to Take if Your Business Falls Behind on Debt Payments

Steps to Take if Your Business Falls Behind on Debt Payments

Falling behind on debt payments can be a scary situation for any business owner. However, it is important not to panic. There are steps you can take to get your business back on track financially. Here are some practical tips on what to do if your business falls behind on making debt payments:

Assess Your Financial Situation

The first step is to clearly assess your current financial situation. Review your books and determine exactly how much money is coming in and going out each month. Also take stock of all outstanding business debts and when payments are due. This will help you understand the full scope of what you owe and how much cash flow you have available to service that debt.

Some key questions to ask:

  • How much do we currently owe to all creditors and when are payments due?
  • What are our current revenue streams and monthly cash flow?
  • Are we dipping into reserves/savings to cover shortfalls each month?
  • How large is our accounts receivable balance and how quickly do clients pay invoices?

Having clarity around the numbers will help guide the next decisions you need to make.

Communicate with Creditors

Once you have assessed your situation, an important next step is to contact all creditors and explain that you may have difficulty making upcoming payments. Emphasize that you want to keep lines of communication open during this time.

When you initiate this contact, be prepared to answer questions about your current struggles and have an updated balance sheet ready to share. Explain when you anticipate being able to resume normal payments.

This is also the time to find out whether creditors can offer some temporary relief, such as:

  • Adjusted payment plans
  • Lower interest rates
  • Extended payment terms

The earlier and more frequently you communicate struggles, the more willing most creditors will be to work with you on repayment solutions. Ignoring issues or avoiding creditor calls usually makes matters worse.

Prioritize Payments

With limited cash flow available, you will need to decide which obligations to prioritize paying first.

Some tips on payment prioritization:

  • Payroll – Keeping talent is critical, so payroll to employees should take top priority. Even if you cannot pay full wages, do what you can. Unpaid wages can also result in lawsuits.
  • Taxes – Not paying taxes has serious consequences, including potential liens or legal action. Paying payroll taxes and sales tax should take priority.
  • Secured debt – If you default on secured loans, the collateral backing them can be seized or foreclosed upon. This may include equipment loans, commercial real estate loans, etc. Try to stay current on these payments.
  • Unsecured debt – This includes credit cards, lines of credit, accounts payable to suppliers etc. While important to pay if possible, unsecured debt is generally the last priority.

As much as possible, keep communicating with all vendors and creditors, even if you cannot pay. You can potentially negotiate partial payments, discounts, or new payment plans that ease the burden until business recovers.

Explore Financing Options

There are several options businesses can explore to access additional financing during cash flow shortfalls:

  • Bank loans – Discuss your situation with your current bank or lending institution. They may provide emergency bridge loans or be able to modify existing loan terms. Be ready to provide updated financial statements.
  • Government programs – The SBA offers several loan and grant programs to support small businesses in need. For example, the SBA’s Economic Injury Disaster Loan provides up to $2 million to help meet financial obligations during hardship.
  • Business cash advances – These advances on future credit card sales can provide quick financing but have high repayment rates. Use only as a last resort if other options are unavailable.
  • Equity financing – Bringing on an investor by selling shares in your business is another option. This works best for established businesses with strong fundamentals.
  • Personal funds – As a last resort, some owners invest personal money into their business to keep it afloat. Make sure to explore all other options first.

Reduce Discretionary Spending

To free up cash flow for making debt payments, reduce all non-essential spending to an absolute minimum.

  • Institute a hiring freeze until revenue improves
  • Ask staff to cut back hours or move to part-time
  • Defer planned capital expenditures if possible
  • Eliminate unnecessary travel/entertainment/marketing
  • Renegotiate contracts with vendors/suppliers
  • Explore office space downsizing if you can

These cost cutting measures will help conserve cash in the short term. That freed up money can then be redirected to pay critical bills and meet debt obligations.

Consider Restructuring Your Business

If the financial struggles persist for an extended time, more dramatic business restructuring may become necessary. Here are a few options to consider if the situation becomes dire:

Debt Consolidation

Work with a debt consolidation firm to lower interest rates and consolidate multiple business debts into a single, more manageable payment. This can reduce overall monthly payments.

Debt Settlement

For severely delinquent debt, negotiate directly with creditors to settle outstanding balances for less than what is owed. This can eliminate debt but will damage credit.

Chapter 11 Bankruptcy

As a last resort, Chapter 11 bankruptcy allows a business to continue operating while a repayment plan is developed under court supervision. This can eliminate debt but makes financing difficult.

Create a Recovery Plan

Once you have taken steps to address the immediate cash issues, develop a go-forward “recovery plan” to get your business back to financial stability. This plan should include:

  • Financial projections – Monthly cash flow, profit/loss and balance sheet projections to plan the recovery
  • New revenue strategies – Specific initiatives to increase sales and revenue
  • Continued cost reductions – Maintain tight discretionary spending controls
  • Milestones – Key monthly metrics to gauge progress as you work back to stability

Share this recovery plan with your creditors to demonstrate you have a disciplined approach to righting the ship. Provide regular written progress updates on how you are tracking against the plan. This proactive communication is key to maintaining positive creditor relationships as you work through financial challenges.

Don’t Lose Hope

It can be emotionally difficult for business owners when finances spiral out of control. Many successful entrepreneurs have stories of nearly losing everything just before their business took off.

Focus on the immediate steps you can control, maintain open communication with stakeholders, and don’t be afraid to seek help from turnaround experts if you need additional support. Stay patient and keep fighting to turn things around. This too shall pass.

Additional Resources

For anyone needing additional help or advice on navigating business financial troubles, here are a few useful resources:

We hope these tips help provide a roadmap for any business owner struggling to pay off mounting debt. Just remember – you have more options than you think. Stay proactive in attacking the problem and keep pushing ahead toward recovery.

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