A difference between a business that succeeds and the one that struggles can mean taking on the right amount of debt at the right time. According to SBE Council statistics, about a half of new businesses survive the first 5 years, while only one third is there after a decade. The reasons for their failure are usually too much debt, poor credit arrangements and insufficient capital.
Startups often get into debt by borrowing money in order to finance their expansion or growth or bolster cash flow. However, the past few years were difficult for small businesses due to the Great Recession. Small businesses tend to borrow too much money and overextend themselves because they have no capacity for making back what they owe.
One route (which comes at a steep price) that small-business owners take in order to salvage their diminishing companies is – bankruptcy. However, it can cause long-term damage to both the owners’ personal credit scores and the business. Thus, the business owner should have a strategy for getting out of debt (or at least an exit strategy in order to minimize the financial consequences).
Revisiting The Budget
The most obvious sign that your current budget is not working out the way you expected is seeing debts keep piling up. Revisit your current budget plan, adjust it and create a budget based on the current financial situation of your business. Your business’ revenues should more than exceed your fixed monthly costs such as utility bills and rent. Next, a share of the budget should be allotted for variable costs, while much of what is left should be used for paying down the debts. For example, if a credit-card debts awaits to be paid, always try to pay off more than just the minimum, because your debt will only keep building up and it will take months or even years to pay it off. Use accounting software or web-based accounting programs to keep track of your budget more easily.
Prioritizing Debt Payments
Your best debt-paying efforts should be directed at tackling those debts with highest interest rates (usually those kind of debts are related to credit card obligations). However, if a supplier or creditor can come after your personal assets (meaning that you have personally guaranteed any of your business’ debt), then prioritizing those debts should become the matter of highest concern.
Cutting Unnecessary Costs
By doing this you will free up some money, which you can then redirect to paying off your debts. First of all, you should identify which parts of the business got the company indebted in the first place and deal with them. For example, if you are having cash flow problems due to customers who are not paying on time, put an additional effort in collecting as much debt owed to you as possible. You can do it by contacting your debtors with a friendly payment reminder, an overdue payment reminder, a final notice, making direct contact, or by seeking debt recovery agency help.
You will be able to reduce monthly costs without harming your credit by simply consolidating your loans into one payment. Consolidating more short-term loans into one long-term loan is the best-case scenario.
Negotiate With Your Creditors
First, tell them about the hardships of your business’ financial situations. Then, ask them if they can provide better payment terms. In case you are not offered one, request to get a reduced settlement amount or a payment plan. Convince them that you will pay them the debt faster if they reduce the debt. Just make sure that you are able to fulfill your part of the deal (setting up a repayment plan with a creditor and failing to pay it off is the worst thing a business owner can do).
By using some of these strategies, you can set a debt-payment plan and carry it through in a period of time (which depends on the size of debt and available funds). If you cannot manage to achieve a deal with your creditor, seek the help of a credit counseling organization. However, if your business debt issues are serious, you should think about getting advice from a bankruptcy attorney.
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