Just like people, businesses can easily take on too much debt in an effort to get started. Many times, the debt is in the form of high-interest credit cards. How a business manages debt can mean the difference between success and failure. We asked three local experts to weigh in on how businesses can handle their debt and pay it off more quickly.
—Emily Kern Hebert
Many small business owners have financed their company’s startup through personal resources, and until they are able to afford a financial infrastructure that provides professional advice (in other words, having a CFO or CPA), their strategy to reduce debt is very similar to those of the consumer.
Expenditures and cash conservation need to be prioritized based on a hierarchy of wants versus needs. Once the cash needs are prioritized, then the process of debt reduction becomes more tactical.
Consider whether you have properly matched your debt maturity to your asset life. For example, have you financed an equipment purchase with a credit card or short-term line of credit?
Meet with your banker to discuss potential restructuring of your debt, lengthening the payments over time, which could free up excess cash for debt reduction. Use that excess cash to pay off the highest interest rate debt first.
You may also be able to quickly free additional monthly cash flow by eliminating any small balance debt with high minimum payments.
Prioritize, make a plan and diligently execute—ignoring the problem and hoping it goes away is rarely a successful strategy.
There are several things that a business owner can do to ensure that debt doesn’t sink your company. First, you must do an analysis of the debt structure of your company and how you got into the shape that you are currently experiencing. Make sure that all of your long-term assets and equipment are structured on long-term payouts. Once this is done, it is critical to develop a strategy to retire your short-term debt.
If you are one of the small business owners who have used credit card debt to operate your company, begin immediately paying off or restructuring that debt. Credit card debt is too expensive and you will never catch up if you rely on this for operating your company.
As sales are collected, dedicate as much as possible to retiring the high interest, short-term debt. Continue to make payments on long-term debt and if needed, speak with your lender to lengthen the terms of the debt to help you catch up, while staying current on these and retiring other debts.
Make sure that any windfall sales or collections go to retiring debt and establishing a reserve account for unscheduled repairs or other unforeseen circumstances that would force you into adding more debt.
Finally, don’t buy anything until you can pay cash for it.
Looking at business debt has to be part of a greater look into overall business planning. Attacking debt in isolation is like asking which antacid to use for heartburn, but not asking which food you are eating to cause the heartburn. Accumulated debt can be a signal that a business needs to rethink its strategy.
Start with categorizing your debt to see the amounts and terms of each type of debt you have. From a short-term perspective, paying off higher interest rate loans or consolidating them into lower-rate products can save money.
However, be careful to tie this to an understanding of where this debt came from and how the business can avoid the same situation in the future. Then work to reduce business expenses. Use the savings to pay down debt. Increase your productivity to increase sales, because nothing heals like more cash flow.
Consider consolidating or restructuring your rates and terms for a more favorable agreement. Ask for advice from your CPA or a business mentor. And, of course, stop taking on new debt if possible.
If you fall behind on your payments, be sure to stay in touch with your creditors. Communication is key.