Make a new business budget
Ignoring debt won’t make it go away. But in some cases, what feels like overwhelming debt is just disorganized income, or income you haven’t optimized towards paying off debt.
So, first things first: examine your current numbers and make a new small business budget.
- Read our guide to small business budgeting
- Identify your total debt (your bookkeeper can help with this)
- Understand your current cash flow. How much income are you generating?
- Download a budget template and map out the rest of your fiscal year
- Determine how much cash you can allocate every month to paying off your debt
The goal of this exercise is to know exactly how much you owe, and decide how much cash you can allocate to paying off debt each month.
Need a good budgeting template? We link to the best templates in our How-To Guide to Small Business Budgeting.
Pick a debt-reduction strategy
The best strategy to pay down business debt will depend on how much you owe, your current cash flow and, in many ways, your willpower.
Two common debt reduction strategies include:
The spartan strategy. Create an essentials-only spending plan and outline what you won’t spend money on until your debt is paid off. Hard to stick to if you’re more of a “spender” than a “saver.”
The percentage strategy. Dedicate X percent of your profit to paying off extra debt.
These strategies can be used for paying down all types of small business debt, but they’ll only be effective if you have your small business finances dialed in (that’s where the budget comes in handy).
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Set a “get out of debt” timeline
With your budget and debt reduction strategy in place, you should be able to calculate when you’ll have paid off all of your debts (provided you stick to the plan, of course).
Plotting the end date, plus a few other “debt repayment goals” in your calendar, will keep you motivated and help you measure how well you’re doing with your loan repayments.
Here’s an example
Here’s what a simple debt repayment timeline would look like if you paid off $12,500 in debt over the course of three years.
The goal is to set a deadline for fully paying off your debt, and marking debt repayment targets on the calendar. It’ll help you see how well you’re doing over the course of time.
If you’re paying interest on your debt, make sure you factor that into your repayment timeline.
||Year 1 Debt
||Year 2 Debt
||Year 3 Debt
|Debt at year end
If this is too simple for your needs, you might prefer a proper debt reduction spreadsheet.
Restructure your debt (if you can)
Restructuring your debt can sometimes reduce how much you owe. It’s worth giving any of the following methods a shot if they apply to your situation. When in doubt, ask your accountant for help on this front.
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Look for loopholes in your loans
Go back and check the terms of your loans. Knowing your loan terms can help you use extra cash strategically when you’re paying off debt.
For example, what happens when you pay extra on your monthly loan repayment? Sometimes the surplus can be credited to a future payment, or it might be deducted from the capital (not great if cash flow is already tight).
Loopholes like these usually only apply to instalment loans and payments to vendors. Credit cards and lines of credit don’t have structures that make this advantageous.
Negotiate terms with vendors
Can you extend payment terms on any outstanding invoices? Alternatively, can you negotiate a bigger discount for early bird payment on new purchases?
Renegotiate the terms of your loans
If you’ve fallen behind on your payments, don’t be afraid to pick up the phone and negotiate the terms of your loan.
Sending loans to collections represents a huge loss for lenders; the last thing lenders want to do is send a collections agency after you. Explain your financial situation and ask your lender if they can be flexible with late fees, restructuring payments, and even renegotiating your interest rate. A hardship letter may also help to support your negotiation efforts with creditors.
Just be aware that renegotiating the terms of a loan is likely to ding your credit score, so it’s best to use this tactic when you’re not planning to apply for additional credit in the next year or so.
Consolidate your debt
Debt consolidation is where you take out one large, preferably low-interest loan to pay off several smaller business loans. This can simplify your monthly finances, and generally carries a lower interest rate than other loans. Watch out, though: many of these require collateral or personal guarantees that might add up to uncomfortable risk.
Debt consolidation works well for businesses with multiple small business loans or lots of credit card debt, resulting in high interest or too many debt payments each month. To make sure you get the most out of this method, it’s best to seek the advice of your accountant or a financial advisor before consolidating debt. The key is to make sure this method doesn’t just free up maxed out lines of credit and get you in an even bigger hole.
Hire a debt restructuring firm
If restructuring your small business debt is too much to deal with on your own, consider working with a debt restructuring firm. For a fee, they will negotiate with collection agencies and creditors on your behalf in order to extend or change your existing credit agreements.
Reduce your spending
We’re getting into the bonus rounds now. Find ways to spend less and you’ll have more cash to reduce small business debt. Sounds painfully simple, right? It’s harder than it looks. Here are a few ways you can go about it.
Know your numbers inside out
Do you know the cost of your raw materials, supplies, labor, office supplies, rent, car lease, transport, marketing, and everything else you spend money on to run your business? Becoming a pro at reducing your spending starts with having a razor sharp understanding of how much you’re currently spending.
Automate your debt payments
Pay your debt first. Every time you receive a payment, immediately forward a percentage of the revenue to your lender. If you don’t have the time (or willpower) to do this manually every time you get paid, set up an automatic transfer from your bank account so you don’t feel tempted to keep the money in your account.
Re-examine your margins
If you attract customers with products or services that only yield low margins, you might benefit from eliminating these from your business. Maximizing the sale of products or services that yield high margins can help you cut spending on products that aren’t really generating revenue.
Sell, then lease
If you have a relatively new business vehicle or other large items in your business, selling them—then leasing them back from the original vendor—could help you cut down spending. Run the numbers to make sure this strategy makes sense in the long run before you make the switch.
Unleash your inner Scrooge, within reason. We have a bunch of ideas on how to reduce expenses in our Small Business Owner’s Guide to Cutting Costs. From small things like how to reduce your office clean bill, to big stuff like how to downsize your office.