Entrepreneurs frequently try to reduce debt as a means of putting their business in the best possible financial position. Eliminating debt altogether is generally unrealistic – chances are, you’ll need some financial help to run your small business, and that's basically the way of the business world. However, lessening your company’s debt load can ease your cash flow and help your business grow and prosper. Following are four tips to help you reduce your small business debt.
1. Evaluate what you owe
Reducing debt starts with evaluating the debt that you already have. Look at all your monthly payments, along with the interest rates you’re paying, and sort your debts out with these things in mind. Look at your credit cards, business loans, vendor payments due, etc.
Once you've managed to get a good look at it all, decide how you to prioritize your payments. It's generally a good idea to pay off the debts with the highest interest rate first, but you may need to weigh other factors as well, depending on your situation. As a rule, you should pay back debts as quickly as possible. Paying off each debt one at a time can be an effective method, especially if you start with the debt that has the highest interest rate.
2. Renegotiate and refinance
One of the best things you can do is to communicate with lenders. It's easy to just make payments as they're scheduled, but negotiating with lenders and talking to them about refinancing options may help save you some money, get better interest rates, and eventually reduce your debts. Ask about loan consolidation programs, which may help you group multiple loans together for a single monthly payment and interest rate. Talk to your bank to see if a loan guaranteed by the Small Business Administration might help your company. SBA loans tend to have more flexible qualifying standards, longer terms, and lower debt service requirements.
If you are having trouble making your loan payments, Bridgette Austin at Quickbooks recommends finding out if you qualify for a hardship plan (which would include a lower interest rate or payment extension): "Creditors typically require a hardship letter that explains your current financial situation and provides proof that you require assistance to meet your debt obligations. For example, creditors and lenders may request to see: Current and previous tax returns; Bank account statements; [and an] Income statement, balance sheet or any other financial statements."1
3. Collect payments more quickly
Small businesses often go into debt to solve cash-flow problems instead of better managing their cash flow. Do everything in your power to collect payments from customers more quickly to help improve cash flow.2 Part of this is being diligent with recordkeeping. Doing business with those who are able to pay quickly is also a major factor.
Beyond collecting payments, a business line of credit can help with cash flow. Advances on your line of credit can be paid off as soon as receivables come in. This can help you avoid taking out a long-term loan.
4. Don't slow your business down
A lot of businesses will make sacrifices that impede their growth, just so they can put more resources toward paying off debt. While this may seem like the right thing to do at the time, it's a mistake that can have an even more detrimental effect on your business overall. You must always be seeking growth, and as you grow, debts will become easier to repay. Slowing down is seldom the answer.
Reducing debt can go a long way toward helping your business prosper, while freeing up credit to help you through the rockiest of times. Be sure to consider small business financing options to help you reduce your debt and remain ahead of the financial curve.
2. Click here for a NevadaSmallBusiness.com article on managing cash flow.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.