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How to Survive Small Business Debt

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 How to Survive the Burden of Small Business Debt
Nadav Shemer
Nadav Shemer
Mar. 05, 20214 min read
Most of the 29 million small businesses in the United States wouldn’t exist without borrowed money. Businesses loans, lines of credit, and credit cards all provide capital to spend on new equipment and employees and finance growth.

Debt is a necessary part of doing business but it also presents risk. It’s estimated that half of small businesses shut down within their first 5 years. The average American small-business owner has $195,000 of debt, according to a 2016 Experian report. Fortunately, there are many things you can do to ensure your small business enjoys the benefits of borrowing but avoids falling into the debt trap. 

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Map Out Your Debt

Knowing your monthly earnings and monthly payments is key to managing your debt. Your monthly earnings (or net income) are your revenues subtracted by all other business costs, such as taxes, salaries and other expenses. If you have a business loan, your monthly payments are your principal (the total loan amount divided by the number of months to pay it off) plus interest. Stable cash flow and a disciplined budget can also help you pay off your debts. If your cash flow and spending are predictable, then it should be easy to predict how much money you’ll have at the end of each month to pay your lender. But if cash flow is variable and you lose track of expenses, you may have trouble meeting payments and start generating more debt than you can handle.

Businesses can adopt any of a number of debt-reduction strategies, including: 

  • Only spending on essentials until debt is reduced to a certain amount
  • Dedicating a specific portion of earnings to extra debt payments
  • Paying off extra debt if income reaches a specific target

Be Aware of the Terms of Your Loan

Before borrowing money, read the fine print. Business loans and lines of credit can include loopholes – some of which may help you and others which may cause headaches. 

For example:

What is your lender’s policy on early payments? Paying off some of your debt earlier than scheduled can be a great way to reduce your debt burden. But some lenders impose penalty fees, making early payments less worthwhile. 

Does the lender offer a grace period? A grace period can be a good opportunity for a business to generate positive cash flow before starting payments. But back-ended payments can be a problem for businesses if income falls short of expectations. 

What are the penalties for late payments? In some cases, such as when income is seasonal or highly variable, your business might find it preferable to pay late payment fees. But late payment fees can damage a business if not planned well in advance.

Negotiate Terms and Why it Might Work

If you find yourself unable to meet payments, you might want to consider renegotiating terms. Collections are expensive for lenders; if you can show that you’re unable to meet your monthly payments, your lender may consider it more practical to accept smaller amounts rather than run the risk of your business defaulting on the loan. Debt management (or debt negotiating) involves having your lender agree to a lower interest rate or to extending the loan term in order to reduce your monthly payments. If your loan isn’t secured by collateral, there is also the more drastic option of debt settlement: this involves a creditor agreeing to accept a portion of your outstanding debt instead of the full amount.

To begin negotiating, you’ll need to send your lender a hardship letter outlining your case. It should explain:

  • Why you’re unable to pay back the loan, i.e. how your business’s financial position has changed since you took out the loan
  • What attempts you’ve made to remedy the situation, i.e. slashing your budget, writing up a monthly payments plan
  • Why your situation is unresolvable

Automate Your Payments

The way to ensure you don’t miss your monthly payments is to automate them. Aside from saving you the trouble of manually paying your lender every month, automated payments can have a positive psychological effect. If you see your monthly payments coming out of your business bank account every month, it’ll naturally be easier to factor in those payments when budgeting your monthly expenses.

These are 3 of the most common ways of setting up automated monthly payments:

  • Have your lender withdraw it
  • Through your online bank account
  • With your credit card

Consolidate Debt

Debt consolidation refers to the transferring of debts from one or multiple lenders to a single business loan from a new lender. Your new lender deals with paying off your old debts and offers you a new loan, ideally with a lower interest rate and lower monthly payments. It can be difficult enough for small business owners to pay back one loan. But if your business has debts from multiple lenders, having to manage all those payments could be the thing that prevents you from growing your business – or worse, leads to it shutting down altogether. Debt consolidating makes it easier to manage your monthly payments and reduces the possibility of defaulting.

Increase Your Income

The way to manage your payments is to increase your business’s income. Easier said than done, right? We’d all love for our small business to make as much money as possible. Here are a few of the most common methods by which you can increase your revenues:

  • Diversifying 

Opening a business is expensive, but if you’re already a business owner – then adding another product, service or channel shouldn’t cost you an arm and a leg. Own a coffee stand? Bagels or muffins could complement your business nicely. Operate from a physical store? Opening a website is cheap and simple and could bring in new customers.

  • Raise prices 

Small business owners are often hesitant when it comes to pricing, preferring to sell higher volumes at low cost rather than identifying the optimal price customers are willing to pay for their product. Of course, you’ll want to do some research on your market and competitors before increasing the price of your product. But if you find you’ve been undercharging, a one-off price increase might be the way to raise money for your business.

  • Work a side job 

Unpredictability is a big problem for many small business owners. If you own the type of business that doesn’t need your attention the entire week, then a part-time job can be a good way of generating steady monthly income in the short term.

  • Think outside the box 

Nobody said doing business was easy. But if you think creatively and keep your eyes and ears open to the outside world, you may come up with new ideas to help your business grow.

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Nadav Shemer
Written byNadav Shemer

Nadav Shemer specializes in business, tech, and energy, with a background in financial journalism, hi-tech and startups. He enjoys writing about the latest innovations in financial services and products. He writes for BestMoney and enjoys helping readers make sense of the options on the market.‎

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