Map out a new business budget
The debt won’t disappear if you ignore it. It has to be addressed. The good news is that often the feeling of suffocating debt is more a feeling than reality. Often these feelings are generated by not having organized income to pay off debt.
So to get off on the right foot it’s critical to analyze your current numbers and map out a new business budget.
Read out small business budgeting guide.
Identify the total amount of your debt if in doubt; seek assistance from your bookkeeper.
Gain a critical understanding of your current cash flow and how much reliable income you are generating.
Download a budget template and plot your budget for the rest of the financial year.
Determined how much money can be allocated to pay off debt on a monthly basis.
The goal here is for you to know exactly the full extent of your debt and have enough information to make a decision on how much of your business cash flow can be directed towards paying down the debt each month.
If you need a good budgeting template, please visit our how-to guide your small business budgeting
Choose a Debt Reduction Strategy
How do you choose to pay the annual business will depend upon several factors. These are-how much you owe, your current cash flow and perhaps most importantly, your own commitment to the task.
Two commonplace debt reduction strategies are
The Spartan strategy: As the name suggests, this involves an essential only spending plan and a commitment not to spend money in particular areas until the debt is paid off. This strict strategy is tough to stick to, particularly if you are in the habit of spending.
Percentage strategy: This is a commitment to pay a certain percentage of your profit to pay down debt.
These strategies are useful in paying down debt but their effectiveness is reliant upon full awareness of your small business finances – making that budget critical.
Map Out a Get Out of Debt Timeline
Once you have your debt reduction strategy and budget locked away you will be able to work out when all your debts will be paid off, provided of course you are able to adhere to the plan.
Plotting a debt free date as well as a few other debt repayment milestones is a great way to keep motivation high as well as the track your progress in reducing debt.
Here’s An Example
The debt repayment timeline could look like something like this -: over 3 years you payoff $20000
The goal should be to not only set a deadline for paying off the debt but to mark debt repayment targets on the calendar. This approach will help you to monitor your progress over time.
You will need to factor interest payments on the debt into your calendar.
||Year 1 Debt
||Year 2 Debt
||Year 3 Debt
|Debt at year end
If this simple example is not detailed enough you can access debt reduction spreadsheets that will assist you.
Look to Restructure Debt
By applying some of these debt restructuring strategies it may actually be possible to reduce the amount of debt that you owe. If in any doubt at all, it may pay to seek advice from your accountant in this area.
Look for Loan Loopholes
It’s worth reviewing the terms and conditions of your loans. This may help you to access extra cash as you’re paying off debt.
For example: How are extra loan repayments treated? In some circumstances, extra payments are added to future payments or in some cases they might be deducted from the capital
Loan loopholes only usually apply to principal and interest loans or perhaps to payments to vendors. Credit cards and lines of credit are not structured for you to take advantage of loopholes.
Look to Negotiate Vendor Terms
Look to discuss extending payment terms for outstanding invoices or perhaps negotiate for discounts for early payments.
Renegotiate Loan Terms
In the event that you are behind on repayments the best option is to get on the front foot and seek to renegotiate the terms of your loan with your lenders.
Lenders will welcome your approach as sending loans in arrears to collections agencies represents substantial costs for the lender. Open dialogue and give a full explanation of your current situation. This may help you to get some lenient treatment from the lender in terms of waiver of late fees, repayment restructuring and perhaps a better interest rate. In some circumstances drafting a hardship letter will also assist your efforts
Before going down this track it is worth remembering that renegotiating the terms of a loan may impact negatively upon your credit score.
Consolidate Your Debt
Debt consolidation is essentially taking out one loan to pay off several loans at once. This strategy should help to simplify cash flow and usually will be written at a lower interest rate than the other loans. On the downside, these loans may require some form of collateral to be offered which may carry an unreasonable risk.
This strategy can work really well for businesses that have lots of small lines of credit or credit card debt that cause too many debt payments and high interest rates.
To ensure that this method is right for you it may be worth discussing your options with your accountant or financial advisor.
Hire a debt restructuring Firm
Sometimes restructuring your debt can be overwhelming. In these cases it may be worth considering using a debt restructuring firm to do the debt renegotiation for you. These firms will obviously charge a fee for their service.
Reduce Your Spending
It’s a simple strategy. Find ways to reduce spending and there will be more cash left over to reduce business debt. You can look at the following options to do this
Know your business numbers inside out – cost of supplies, raw materials, labour costs, rent etc. When you know those numbers in intimate detail, you will be able to recognise potential savings and negotiate cost reductions.
Automate debt repayments. Look to pay your debt first and be disciplined enough to always forward a percentage of payments received directly to the lender.
Put your margins under the microscope. Which products have low margins and do you need them? Look to maximize sales of products that deliver high yield.
Sell then lease back. Current assets that you have in the business may be worth selling and leasing back. It’s a strategy worth investigating to free up capital and reduce debt
Prune costs wherever possible.
Generate More Income
It’s obvious but not necessarily easy. More income means more free cash to pay down debt.
But if it were that easy, you probably wouldn’t have a debt problem in the first place.
There may be ways to generate extra income by looking at low hanging fruit – methods to bring in cash quickly such as
Diversifying by adding complementary products or services that fit your business model
Increase prices – if done sensibly price rises will add to cash flow without affecting customer relations. For added insurance in this regard make it a policy to inform customers about impending price increases and ask if they want to order in advance. This alone may assist in generating extra cash flow.
Upsell -are there ways to sell more to your existing clients? Is it possible to bundle products together and offer packages? Are there other ways to get your existing customer base to buy more from you? A simple email informing customers of limited offers and subscriber only deals could have just the effect that you desire.
If your cash flow is being hindered by stale inventory it may be time to review purchasing habits and maybe look for suppliers that offer right to return for goods that remain unsold.
Consider Working Another Job
While not ideal, taking on extra work for wages may be a way to help you over a short term financial bump in the road.
Sell Unused Stock and Assets
Sometimes called liquidating your assets, this is a good way to generate cash flow. Consider what assets your business owns and doesn’t use and look to sell them off. You can place office furniture on eBay or even sell off part of your business. You need to be careful with this method as anything that you’ve offered as security for existing debt cannot be sold.
What other ways can you employ to generate income or cash? Is it possible to lease a portion of the existing building to another business? Do you need the office space you currently use? Would it be better to work in a remote location and save on rent?
It’s time to think outside the square.
Your existing assets may be a possible source of extra income. You don’t have to go as far as the entrepreneur who let out her bedroom on Airbnb and raised $28,000 in startup funds but you’re only limited by your imagination.
When you’re faced with struggling to overcome small business debt, it’s perfectly normal to feel overwhelmed. The best way to cope with this feeling is to pick several debt reduction ideas from this article and make a commitment to making them happen.