How To Eliminate Small Business Debt In 7 Simple Steps


In a debt-based financial arrangement, the borrowing party gets permission to borrow money under the condition that it must be paid back at a later date, usually with interest. Be aware that any new money will be expensive for you. Investors who might have wanted 5% of your new business in exchange for their money might want 30% now you’re in difficulties.If you fail to make payments on your debts, the consequences are often disastrous. They can include loss of employees, seizure of stock and costly court cases brought by your creditors. The U.S. Small Business Administration offers the SBA Microloan Program.

  • Upon default, the collateral may be sold or liquidated, with the proceeds used to repay the loan.
  • Their debt is secured by the cashflow of the business so there will be ratios that you need to meet to keep them happy, in addition to paying the note down over time.
  • Do you have relatively new fleet vehicles or other larger items?
  • If you have older debt, it’s time to renegotiate the terms.
  • You’ll be able to pay these back daily or weekly, and you can also pay early while avoiding prepayment penalties.
  • Compared to the five to 20 years common with loans from the government and banks, this period is brief.
  • For businesses that can’t manage their debt, it might be time to think about selling the business, liquidating all assets, or filing for bankruptcy.

Cutting costs is a surefire way to increase cash flow and reduce your debt load. Use good quality accounting software to keep a close eye on your outstanding debt and monthly payments. This information should be at your fingertips at all times.Good CompanyEntrepreneurs and industry leaders share their best advice on how to take your company to the next level. RunPractical and real-world advice on how to run your business — from managing employees to keeping the books. Nav’s free calculators to help you understand the cost of any loan you’re considering. Get rid of the expenditure altogether as soon as possible. Some cuts here will be hard— letting go of an employee, for example— but may be necessary to keep your business afloat.

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Or you can continue to pay the same amount each month but pay your debt off faster. If you’ve found other ways to cut expenses or increase revenues, you may even be able to make larger payments to retire your debt faster.ZenBusiness Academy Get free resources and everything you need to know to start, run, and grow your small business. Business Know-How Browse hundreds of helpful articles on everything business. “A lot of are in survival mode and can forget that they’re managing a business and need to interact with clients and look for growth opportunities,” Alozie says. Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page.If you can maintain the same amount of sales, charging more for your products or services is a quick way to increase your income. Before you raises prices, tell your existing customers that prices are going up soon and ask them if they’d like to order anything before the change is in effect. These strategies can be used for paying down all types of small business debt, but they’ll only be effective if you have your small business finances dialed in (that’s where the budget comes in handy). If you’re facing increasing debt, take action instead of hoping for the best.Unsecured debt is debt that does not require collateral as security. The creditworthiness and the debtor’s ability to repay are reviewed before consideration is given. Since no collateral assignment is issued, the debtor’s credit profile is the primary factor used in determining whether to approve or deny lending. There are different schools of economic thought about this, but don’t assume cutting costs will automatically save you money. The bank may want to charge a higher rate due to the perceived increased risk of default, so you won’t save as much money as you might like. Outgoing costs such as rent and utility bills need to be paid to keep the lights on! And again, not paying these could affect your credit rating.

how to eliminate small business debt in 7 simple steps

Check with your local professional advisors to find out if there are any laws that regulate what late fees you can charge. Good business relationships happen when both parties feel respected and valued. Of their past market value.6) Far more significant is the likelihood that aggressive use of debt will make it difficult to raise necessary funds quickly on acceptable terms. And, obviously, liquidity constraints can lead to altered operating and product-market strategies that, in turn, may reduce a company’s market value. Paying down this pandemic debt can help business owners rebuild their companies.Cut your shop floor space and you’ll save rent, but reduce the range of stock you can display to customers. Make some of your staff redundant, and you won’t be able to handle any larger contracts that come your way. You might feel like you need to cut costs to the bone when debt looms over you, but sometimes it can be counter-productive.If you have tried the above strategies and are not making progress, you may consider working with a professional to help get your debt under control. There are firms that specialize in business debt strategies as an alternative to bankruptcy. Creditors may be willing to lower your interest rates, make temporary modifications to your repayment requirements, or even help you consolidate your debts into a new debt with better terms. Just make sure you understand how consolidation works. Where is the low-hanging fruit for you to make some cash?

Look For A Cash

The idea is that you pledge certain assets in your business as collateral for borrowing money from a bank. A commercial lender might lend you 60% of the value of your accounts receivable balance, for example and 50% of the cost of your inventory. The amount you borrow can then shift up or down based on the balance of your AR or your inventory. As too many businesses have learned the hard way, the time to build financial reserves is when things are going well. Correcting an unduly aggressive use of debt is always painful, but especially so if that adjustment must be made under duress. Renegotiate contracts to request payment upfront or offer incentives to customers who can pay six or 12 months in advance. Seek professional advice from your bookkeeper or accountant if you need help figuring out your budget.Contrary to stockholders’ involvement in the management of a company, the financier of debt has no involvement in how the company is managed. For consumers, interest expenses are deductible for mortgages but not for regular consumer debt. Peggy James is a CPA with over 9 years of experience in accounting and finance, including corporate, nonprofit, and personal finance environments. She most recently worked at Duke University and is the owner of Peggy James, CPA, PLLC, serving small businesses, nonprofits, solopreneurs, freelancers, and individuals. More than a third of business owners are less than comfortable about their levels of debt, so you’re not alone. Do everything you can to keep your business running, and talk to local business advisory agencies to see what help they can offer. For example, if you slash your marketing budget you might save a lot of money in the short term, but you will lose potential new clients.

how to eliminate small business debt in 7 simple steps

“Cash flow-based lenders will also consider outside personal income as a positive addition and will give you credit for this in their cash flow equation,” Senturia said. “Since many business owners rely on the business to cover their personal expenses as well, the impact of personal debt loads oftentimes will be factored in.” Byconsolidating your loans into one payment, you reduce your monthly costs without harming your credit. The best-case scenario is consolidating several shorter-term loans into one long-term package with a predictable interest rate. This small business debt management strategy will greatly ease your repayment load and help keep you from going under.Note grace periods, deadlines and action items, such as applying for forgiveness if you received a Paycheck Protection Program loan. If your business needs more money than even what a commercial lender can provide, your next option would be to find what’s called a mezzanine lender, often a private equity investor or group of investors. These loans are not tied to any assets in your business, so they are “unsecured debt.” You can think of them like a credit card. But, just like with credit cards, these kinds of loans can get very expensive as they charge interest rates that might be 10% or higher. With mezzanine debt, you can add another 2 or more turns of debt onto your business, which is something that many private equity firms will do if they own your business. A commercial lender might lend you money based on a multiple of your earnings, usually two to three-times EBITDA.

What Is The Legal Definition Of Debt?

If the lender is taking out a loan on an asset that won’t depreciate, such as education, real estate or their own business, on favorable terms, it’s considered good debt. Debt consolidation involves acquiring new debt to pay off multiple, existing debts. The new loan becomes the single source of debt, which usually results in a lower overall payment, a reduced interest rate, and a new repayment schedule.

how to eliminate small business debt in 7 simple steps

Depending on where you are in your life and your career, you might be facing a little – or a lot – of personal debt. Many would-be entrepreneurs owe money on credit cards, student loans, mortgages, and/or cars. These heavy outstanding balances could put their dreams of business ownership on hold. This traditional theory was challenged by Franco Modigliani and Merton Miller in their landmark article of 1958. Especially given the many-sided appeal of debt financing, good two-way communication between CFOs and the rest of top management is essential. CFOs do, naturally, pay attention to these various considerations, but their main responsibility must be to balance a company’s financial needs with its ability to obtain financing. It is their job to preserve continuity in the flow of funds so that no strategically important program or policy ever fails for lack of corporate purchasing power.

Revolving Debt

If you attract customers with products or services that only yield low margins, you might benefit from eliminating these from your business. Maximizing the sale of products or services that yield high margins can help you cut spending on products that aren’t really generating revenue. If restructuring your small business debt is too much to deal with on your own, consider working with a debt restructuring firm.


Easier said than done, of course, but there are ways you can boost short-term revenue. By taking action, you could reduce your debt payments enough to get you back on track. Depending on where you live in the world, governments have the authority to get their money any way they can. They can seize your business assets, help themselves to the contents of your bank account, declare you bankrupt and even take personal assets such as your house or car.So, when you look at ways to generate additional income, prioritize the low-hanging fruit first—easy methods that bring in extra cash, fast. Find ways to spend less and you’ll have more cash to reduce small business debt. If you’ve fallen behind on your payments, don’t be afraid to pick up the phone and negotiate the terms of your loan. The goal of this exercise is to know exactly how much you owe, and decide how much cash you can allocate to paying off debt each month. Designed for business owners, CO— is a site that connects like minds and delivers actionable insights for next-level growth.Here are 13 things you can do to help lower the amount of debt your business carries. Find opportunities for businesses owned by women and people of color.Explain your financial situation and ask your lender if they can be flexible with late fees, restructuring payments, and even renegotiating your interest rate. A hardship letter may also help to support your negotiation efforts with creditors. As a small business owner, you have a lot to manage—future business goals, vendors, new marketing strategies, and maybe even some employees.