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Last Updated on: 10th September 2023, 12:18 am
How to Get Out of Business Debt
If debt is dragging down your business, don’t despair. You have options to resolve what you owe and get back on stable financial ground. It may take persistence and sacrifice, but freedom from crushing business debt is possible. Here are some smart strategies to pay off your business loans, bills, and other obligations.
Face the Music
First, take an honest look at the full scope of your debt: credit cards, lines of credit, unpaid invoices, equipment leases, bank loans, etc. Make a list of who you owe and how much. Don’t minimize the problem or stick your head in the sand. You need a complete picture before making a plan.
Also scrutinize why you’re in debt. Growing too fast? Poor budgeting? Investing in the wrong areas? Identifying the root causes can guide your path forward.
Get Your Records Organized
To properly manage your debt, get your financial records organized. Gather loan agreements, payment histories, collections notices, credit reports, bank statements, tax returns, and other key documents. Set up a bookkeeping system to track income, expenses, payments, due dates, interest rates, fees, etc. Getting organized helps you make smart decisions.
More money coming in makes debt repayment easier. Brainstorm and implement ideas to grow your sales and profits like:
- Offer new products or services.
- Expand marketing and outreach.
- Renegotiate pricing and terms with suppliers.
- Reduce unnecessary overhead.
Even a modest revenue boost provides more cash flow to service debt. You may need temporary belt tightening too, but income growth is vital.
Prioritize High Interest Debt
Paying down high interest debt first saves money over time. Compile a list of interest rates on your loans and credit cards. Target the highest rates first while making minimum payments on lower rate debts. This “debt avalanche” method speeds up how fast you become debt-free.
Explore Consolidation and Refinancing
Consolidating or refinancing debt can lower monthly payments and interest costs. You combine multiple debts into one larger loan with a lower interest rate. This stretches out payments but saves money long-term. Options include:
- Credit card balance transfer to a lower APR card.
- Debt consolidation loan from a bank or credit union.
- Business loan refinancing into a SBA-guaranteed loan.
- 401(k) loan to repay credit card debt.
Run the numbers carefully to ensure consolidation makes financial sense for your situation.
Talk to Your Lenders
Openly communicate with creditors and loan servicers about your financial challenges. Many will work with struggling borrowers by:
- Waiving fees or reducing interest rates.
- Creating longer repayment timelines.
- Modifying loan terms to lower payments.
- Temporarily postponing or reducing payments.
Creditors want to get repaid, so they have incentive to help preserve your business. Honesty about difficulties can yield helpful solutions.
Selling unneeded assets generates quick cash to pay off debt. Liquidating equipment, real estate, vehicles, inventory, subsidiaries or other assets brings immediate relief. While painful, asset sales remove debt burdens and simplify your business. Use caution not to sell items essential to ongoing operations.
Negotiate With Creditors
Another option is negotiating discounted lump-sum payoffs with creditors. The creditor gets immediate cash; you pay a lower total amount. This works best if you have access to funds to make the lump-sum offer. Negotiating takes finesse and documenting any deals in writing.
Consider Debt Settlement
With debt settlement, a company negotiates reduced lump-sum payoffs on your behalf usually for a portion of the debt. This helps if you lack resources to negotiate yourself. Debt settlement firms charge hefty fees and can damage credit ratings in the short-term. But it immediately resolves unpayable debts.
File for Bankruptcy
Filing business bankruptcy stops collections and legally discharges many debts. Chapter 7 bankruptcy liquidates assets to repay creditors. Chapter 11 reorganizes debts under court supervision. Bankruptcy damages credit but allows a fresh start. Business owners should consult attorneys to understand bankruptcy ramifications.
Change Spending Habits
Getting out of existing debt is only half the battle. To avoid future debt pitfalls, rethink your business spending habits:
- Create and stick to a budget.
- Build an emergency fund.
- Limit use of credit cards.
- Institute better financial controls.
- Say no to unnecessary expenditures.
Changed habits prevent debt problems from resurfacing. You may need help from accountants or advisors to improve money management.
Don’t Lose Hope
It’s easy to get discouraged when facing major business debt. But many entrepreneurs have recovered from far worse debt crises. With steady focus on increasing income, decreasing expenses, exploring all options, and modifying money habits, you can work your way out of the hole. Patience and determination pay off.