Is your small business buried in debt, but you don’t have the cash on hand to keep your creditors at bay? You need to implement a business debt management plan to get out of the red — and fast.
Continue reading to learn how to get a business out of debt.
Calculate debt-to-income ratio
The simple fact of knowing that you are in debt isn’t sufficient to take steps for how to get a business out of debt. From outstanding loans to banks to credit card debt and unpaid debts to vendors, business debt can take many forms. So the first business debt management tip is to make a list of how much you owe and to whom and to assess whether or not you can pay it off or continue to pay down your debt to your creditors.
If you’re not sure whether or not you can continue to pay down your debt, divide your total monthly debt by your total monthly income to determine your debt-to-income ratio. Often, if your debt-to-income exceeds 0.40, you might find it difficult to comfortably pay down your debt because your income is too low.
Collect on unpaid debts
Need money to pay down your debt? The easiest way to raise money is to collect on unpaid debts that your customers or partners already owe you. If you have a streamlined accounts receivable system in place, identifying who owes you and how much should be as simple as looking at the books for outstanding balances or going straight to the source of the invoices themselves.
Then, follow up with each payor and request payment. It may be the case that some payors cannot pay off their balances now, in which case you may need to put in place a payment plan with those payors that clearly lays out the date by which you need the payment. Establishing shorter payment terms and imposing fees on late payments are a few ways to encourage on-time payments.
If your unpaid invoices alone aren’t enough to pay off your own debt, the next step of how to get a business out of debt is to increase your revenues. The two main methods for raising revenues are to sell more units of your product or service or to increase your prices. Selling more may require a change in your marketing or advertising strategy. An example of this would be to introduce a discount for bulk orders.
Increasing your prices may seem easier than selling more, but it can actually cost you business if you apply the price increase without explanation. A more palatable way to increase prices is to provide more value with each product or service so that the higher cost is worth the investment.
At this point, you might have raised the money to pay off your debt. But this assumes that your debt doesn’t increase from its present total, which won’t happen unless you stop the debt at the source. To rein in your spending before it grows larger, look at your budget and take stock of all your expenditures. Identify non-essential expenses and aggressively reduce them or cut them completely.
Devise a new debt payment plan
It’s easy for a small business to go into debt when its debt repayment terms are unmanageable. Now is also a good time to speak with creditors and attempt to consolidate loans (combine multiple loans into one) or refinance a loan (replacing it with lower-interest debt) if you need. Be on the lookout for predatory lenders who may offer you too-good-to-be-true debt management schemes. If you sense a plan is a scam, it probably is, so keep this in mind when negotiating with lenders.
Then, systematically schedule business debt repayments. For example, you might opt to first pay off mission-critical debt that your business can’t operate without repaying (e.g., a relationship with a long-standing vendor that will soon terminate if you don’t make good on an overdue payment). Barring that type of debt, you can also do as financial organization FINRA recommends and pay off your high-interest debt first. Then, you can move on to other, less critical forms of debt, such as low-balance debt.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.