It’s incredibly rewarding to start, own, and operate your own business. However, the costs of taking on big projects plus daily operations can quickly add up, leaving you with business debt.
At times, you might feel stressed by the amount of capital you owe. If you’re planning to reduce your debt, you can get your total under control by breaking it down into manageable parts. Here’s an action plan you can use to stay in control of your business debt.
Evaluate your budget
Sure, you might have done the hard work already and put together a strict budget but, if the costs are mounting, it may be time to re-think your spending.
The first step in doing this is probably the scariest: you will need to figure out the amount of your total debt. While that number can seem daunting, you need to be clear about it.
Once you understand your financial situation, you can move on to evaluating your current cash flow, and forecasting future cash flow. With a clear view of your cash flow, you can then compare what you’re earning with what you owe.
Then, it’s time to rewrite your budget. You may only need to make small adjustments or you might have to make a significant overhaul. Whatever the total, you will want to create a new category for paying back your debt. Even if you can only afford a little to start, you will need a budgetary line specifically dedicated to debt payments. Think of it as a new regular monthly expense.
Grab one of these 7 free budgeting templates to get a head start on evaluating and tracking your debt payments.
Restructure your debt
Just because you started by accruing one type of debt — or multiple, harder to manage debts — does not mean you are locked into that current structure forever. You may be able to restructure your debt in a way that makes it easier to track, manage, and repay.
There are two primary methods to restructure your debt by taking out a new loan:
- Debt Refinancing
- Debt Consolidation
If you choose to refinance, you’re essentially swapping out existing short-term debt with a lower-rate business loan. Once you secure new business funding with the lower interest rate, you use the proceeds to pay off your existing high-interest debt. Interest charges can keep you in debt for much longer than needed, and even lowering your rate by a few percentage points can save you some much-needed funds in the long run.
Debt consolidation, however, merges multiple loans together into one new loan: a single bill, due date and interest rate to keep track of. To consolidate business debt, you would take that full value of your existing debt (or the debt that you’d like to consolidate), so you know exactly how much you need to pay off as a whole. Don’t forget to read the fine print on your loan agreements as some lenders charge prepayment penalties which can affect the total amount you need to borrow. If you’re approved, you then would use the proceeds to pay off your existing loans, simplifying your life with a single monthly payment to manage—and making it easier to budget moving forward. Plus, if you’re consolidating multiple forms of high-interest debt, you may be able to also reap the benefits of a lower interest rate.
Choose a debt reduction strategy
You can also explore some clever strategies to reduce your business debt. Here are a few popular strategies that business owners typically use:
- “Stacking” or “Avalanching”: After you have a clear idea of what you owe, what you bring in and what minimum payments you can cover, you can opt to “stack” your debts. Essentially, this means looking at your debt with the highest interest rate, and seeing what you can allocate to pay above the minimum payment there. Once you pay off the debt with the highest interest rate, you’d then tackle the debt with the second-highest interest rate, and so on and so forth.
- The Spartan Strategy: This is a bare-bones, essentials-only plan for spending where you specifically call out what you will not be spending any money on until your debt is gone. It may seem harsh, but it’s undoubtedly effective if reducing debt quickly is your goal.
- The Percentage Strategy: Fairly straightforward, but rather than putting it in terms of X amount of dollars, this strategy has you declare the percentage of profit that will always be solely dedicated to paying debt.
Once you have an idea of what strategy makes the most sense for your business, create a deadline. With the information gathered from your budget and the accompanying debt reduction strategy you’ve chosen to employ, you should be able to calculate just how long it will take you to be debt-free. Break down your timeline with certain monthly, quarterly, and yearly targets. Having it all planned out makes it easier to manage and stick to a plan.
Negotiate your debt terms
Consider calling your creditors directly to negotiate. They may be willing to work with you to help you repay your debt on a schedule that works for you. Speaking with creditors directly can allow you to explore possibilities like lower interest rates, payment extensions, debt consolidation, and more. They may not accommodate you, but it can be worth asking. You don’t know until you investigate your options. Some creditors may provide a grace period or be able to offer repayment plan options that ease the burden and help you succeed. Writing a hardship letter explaining the situation can also be beneficial to your conversations with your creditor.
If handling this process is too complicated or not possible for you, you may also work with a debt restructuring firm.
Restructuring firms typically will negotiate with creditors and collection agencies on your behalf, for a fee, and may be able to secure more favorable modifications to your existing agreements or even entirely new terms such as:
- Extending the terms of your loan to reduce monthly payments
- Negotiating reasonable payment terms with a lower interest rate that fit your budget
- Mediating a settlement where you pay an agreed-on lump sum that is smaller than what you owe, and the rest of your debt is forgiven
When you hire a firm to take over negotiations, according to QuickBooks, you will likely need to sign a written contract and may be required to set up automatic withdrawals from your bank account to ensure you keep up with your newly established terms. This is why it’s crucial to be honest about how much you can realistically afford to pay on a monthly basis.
There are several online and local organizations that offer free business counseling and can help guide you through the process and walk you through your options, like Small Business Development Centers and SCORE.
By employing some of these strategies and holding yourself accountable, you can begin to make progress in paying off your business debt. By establishing a track record of borrowing responsibly and paying back your business debt on time, you’ll improve your credit profile and FICO score. That will help put yourself in a better position for the next time you decide to borrow funds.
Sources and more learning:
- How to Pay off Your Business Debt, Fast (Bench.co)
- How to Eliminate Small Business Debt (Fundera)
- 5 Ways to Reduce Small Business Debt (QuickBooks)
- Exploring Debt Restructuring Options (American Express)
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Please consult a tax professional for information about tax laws and how they apply to your business.