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Small Business, Small Business Owners

5 Ways to Manage and Pay Off Small Business Debt

By Barry Coleman | Friday September 18th, 2020

small business debt

As a small business owner, you have a lot to manage—future business goals, vendors, new marketing strategies, and maybe even some employees. And that’s far from an extensive list. Add debt to the mix, and you suddenly have one more thing to juggle. Debt is sometimes necessary to get a small business off the ground or to keep it running. But it can create unnecessary pressure and headache. Over time it can stand in the way of your business objectives and become an unsustainable expense. To get it under control, here are five tips to help you manage your business debt.

Categorize and Organize the Debts

First, you should map out each debt that you owe. This can be done in a simple spreadsheet or even with pen and paper. The important thing is to be specific. You want to list every individual debt and include detailed information about it, including the following:

  • total remaining balance
  • monthly payment amount
  • interest rate
  • due date
  • creditor
  • method of payment (check, automatic draft, etc.)
  • purpose of the debt
  • type of credit (loan, personal credit card, business credit card, etc.)

With this information gathered in one place, it will be easy for you to see exactly what you owe and when, and it will help you make a game plan moving forward. This exercise will remind you of the expenses that led to the debt, which may provide the opportunity to reconsider whether those expenses are essential moving forward. It will also influence your plan of attack, because different types of debt can be handled differently.

Identify the Issue

You will want to carefully consider the source of your business’ debt problem. Look with a critical eye to see whether you are on pace to take on more debt or whether the current debt is the result of past expenses that are unlikely to arise again. Knowing the cause of the debt will help determine how to go about solving it.

Reduce Spending and Increase Income

While there are unique considerations for business debts, in some ways you should manage them like a basic personal debt. The two major parts of the equation are your spending and your income. Minimizing your spending will free up extra funds to put toward debt and should help you avoid new debt. Increasing your revenue will also provide more funds for debt and is often a good indicator that your business is growing.

In the business context, changes to your expenses and income may involve the following strategies:

  • Cut out the fluff. Doughnuts for the office, special lunches, extra office space, networking conferences—these expenses can all add value to your business, but none of them are mission critical. If you are in a pinch consider cutting nearly all nonessential expenses with the hopes that you can reintroduce them when you are back on track.
  • Renegotiate prices or contracts with third-party vendors. Be careful not to jeopardize good business relationships, but think about where you may be overpaying and may not have shopped around in a while.
  • Change your prices. Depending on your business model and customer base, you may be able to earn more by either increasing your prices or decreasing them to improve sales volume.
  • Follow the demand. Where is the low-hanging fruit for you to make some cash? One idea is that your customer base may have demand for more of what you offer. Maybe it’s a new related product or service, or maybe your customers would like you to extend business hours. Do some quick research and number crunching to calculate the costs and benefits of these changes.
  • Improve your invoicing. If you are often lagging behind on sending invoices to your clients, work to send them more frequently. This will minimize cash flow issues, which can sometimes lead to debt. Depending on your agreement with clients, you might also consider shortening the due date on your invoices. The accounting software company Xero says that 30-day invoices are becoming “obsolete.” So, consider shortening your payment window to 14 days, especially if you use electronic invoices and payments.

Talk to Creditors

If you see the writing on the wall that you are going to fall behind on your debt obligations, or even if you are already behind, then reach out to your creditors. Proactive communication can go a long way to keep your situation manageable. Creditors are often willing to work with borrowers who are in a bind, especially when those borrowers communicate early.

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.

Consider Professional Options

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. You just have to be careful.

Watch out for high fees and any promises that sound too good to be true. You should also avoid debt settlement. Make sure any arrangement you agree to is clear, and get the terms in writing. If you do not understand how it works or if it sounds too good to be true then take a step back and find an advisor you trust who can review the plan with you.

Also, remember that many business debts require a personal guarantee, which means your own credit is at risk. And, if you have some debts that are actually personal debts you used to invest money into the business you may have a different plan of attack for those. Consider a debt management plan for your personal debts, which can provide a stable and structured repayment plan while you focus your other efforts on your business.

You have a lot on your plate as a business owner. Getting debt under control will make managing your business at least a little easier. Put these tips into action so you can have some peace of mind and start achieving more of your business goals.

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