If your business is starting to feel the strain of mounting debt, it’s probably about time you tighten your belt and start shedding some of the burden. After all, you don’t want to wind up like the approximately eight thousand American businesses that file for bankruptcy protection every year.
To keep your business in the black, dealing with business debt needs to be taken seriously early on. Small business owners know just as well as anyone else how easy it is for a company to take on more debt than it’s able to sustainably repay. This is why cutting costs and freeing up cash is so important for your business’s longevity.
Below, we’ve provided a short list of the best methods for reducing your business debt and creating a business debt schedule that’s actionable and realistic.
What Is Business Debt?
Most businesses owners are a little too acquainted with the concept of debt. Simply put, debt is the sum of money that is owed from one party to another as a result of borrowing. Corporations and individuals alike accrue debt strategically so they can make purchases and capital investments that they otherwise couldn’t afford.
When you take out a business loan, a predetermined interest rate is charged on top, usually in the form of an annual percentage rate (APR). Interest is a surcharge that is added to your debt repayments—managing loan interest rates is an essential aspect of business debt management.
Finding business debt solutions is a fool’s errand unless you understand the basics of interest. Simple interest is a rate charged, usually in percentage form, on the principal amount borrowed from a bank or other lender. Since simple interest is based on a set rate, it is easier to calculate and predict than compound interest.
Compound interest is similar to simple interest except that it is based, as a percentage form, on the principal amount borrowed and the interest that accumulates on top of it. Therefore, compound interest generates more debt than simple interest when all other factors are held constant.
Debt Reduction Strategies to Try Today
Small business owners all over the world file for bankruptcy as a result of taking on more debt than they can chew. To keep your company solvent, you need to borrow wisely and implement business debt relief strategies. This way, you can ensure that your business has the means to operate sustainably in the future.
Rethink Your Budget
When debts keep accumulating no matter how vigilant you are with your spending, it’s time to reevaluate your budget. You may want to consult a financial advisor to help you draft a budget that leaves plenty of wiggle room when it comes to covering your operating expenses.
Remember, every budget contains line items that are guaranteed recurring expenses (i.e., rent, utility bills, etc.) which must be accounted for. Many items beyond these sunk costs are expendable and can be replaced or excised to save money. Once this money is freed up, it can be reallocated toward debt repayments.
Prioritize Your Debt
When it comes to dealing with business debt, most entrepreneurs put it off or refuse to even think about it. Unfortunately, running from the problem won’t get you anywhere. To get rid of small business debt, you need be willing to put your debt repayments first. In other words, you need to act before the debt grows into something insurmountable.
Make more than just the minimum payment. Otherwise, you might get stuck in a cycle in which you’re paying the interest every month without touching the principle, This, unfortunately, doesn’t help you reduce your debt load. If you want to pay down your debt, you need to be willing to prioritize your repayments so you’re paying more than just the minimum every month.
Triage Your Debts
Not all debt is created equally. Sadly, some interest rates are much higher than others, which can result in crippling debt if you let the compound interest accumulate. If you own a business bad debt can be tackled most effectively by chipping away at the most expensive debt first and working your way to the least expensive.
You may have heard of a debt reduction strategy known as the Snowball Method. This method is essentially the opposite of what we mentioned above, which suggests that you should knock out the smallest debt burden first and continue building momentum this way. The truth is, either piece of business debt advice works—it’s just a matter of finding one that you’ll stick to.
Consolidate Your Debt
Debt consolidation can go a long way if you want to find out how to get out of business debt. Merging your various debts and outstanding loans into one easy-to-track payment can help reduce stress and debt at the same time. This is especially true if you consolidate multiple short-term loans into one single long-term loan.
Still not sold on the benefits of debt consolidation? Here are some of the main advantages of merging your debt through a debt consolidation loan:
- There’s only one regular payment to keep track of
- You can consolidate at a lower interest rate
- Fees are often lower than unconsolidated debt
- There is a clear timeline as to when the debt will be paid off
Ramp Up Your Sales
As self-evident as it may seem, boosting your sales can be a lifesaver if you need business debt help. Without consistent revenues coming into your business, it’s impossible to have a sustainable debt management strategy. To help you attract new customers and bring in more sales, here are some of our favorite strategies:
- Run regular promotions (i.e., gift giveaways, email coupons, etc.)
- Ask for feedback through email questionnaires
- Invest in social media marketing
- Increase your social media presence
- Sell the unique benefits of your products or services
Talk to Suppliers
Unlike personal debt, business debt is often owed to those who supply the raw materials used to make or market your products. Therefore, you can’t just skip town and run from your creditors—that would be like biting the hand that feeds you. Instead, you need to build on and solidify the relationships you have with your business’s creditors.
If you are on good terms with your suppliers, politely ask them if they would be willing to extend a little leniency your way. If you’ve been a reliable and respectful customer for them thus far, they may be willing to offer you a debt repayment plan on more favorable terms. After all, your creditors won’t benefit from watching your business fail—they want your company to succeed just as badly as you do.
Finding Your Debt-to-Equity Ratio
One of the best first steps you can take before drafting a debt reduction strategy is to find out what your debt-to-equity ratio is. This ratio says a lot about your business’s financial health by informing you as to about how much you owe lenders in relation to how much equity you own in the business.
There are two main ingredients that go into finding your debt-to-equity ratio. First, you need to find the sum of your short and long-term debts. Second, you need to review your balance sheet to find your owner’s equity figure. From there, all you must do is follow this simple formula:
We’re often asked: how much debt should a company have? To be on the safe side, you always should strive to have a debt-to-equity ratio under 1.0. If your ratio is above this figure, then you owe more money than you have coming in. If your debt-to-equity ratio is high, such as 2.5, then this implies that you owe $2.5 for every dollar your company brings in.
The lower you can keep your debt-to-equity ratio, the better. However, keeping this ratio down isn’t easy. By employing the methods listed above, you can start reducing your debt burden and can make your business more sustainable in the long-run.
Shedding the Debt for Good
Dealing with business debt is never a fun experience. It can, however, be the most important thing you do for the long-term financial health of your business.
If you find that you’re in over your head when it comes to dealing with business debt, don’t hesitate to consult with debt management professionals or financial advisors. Usually, they have the experience and means to weed out inefficiencies in your business’s debt reduction strategy and can even negotiate better repayment terms with your lenders.
Don’t end up like the thousands of American small businesses that filed for bankruptcy protection this year. Instead, draft and implement a debt reduction strategy that cuts to the heart of the problem—overspending, and underpaying.