How to Reduce Business Debt

Running a totally debt-free business might not be possible, but reducing your debt is a wise move. Here are 13 things you can do to help lower the amount of debt your business carries.

Your business is no different than your home — too much debt can cripple you. Although it might be difficult to run a debt-free business, you should try to manage and reduce it as much as possible. Business assets can be used as collateral for secured loans, but failing to meet debt obligations could result in creditors seizing business assets, including funds in business bank accounts.

Understanding Small Business Debt

Small business debt is a common phenomenon that can be both beneficial and detrimental to a business’s growth and success. Understanding the concept of business debt, its types, and its effects on cash flow is crucial for small business owners to make informed decisions about their financial management.

What is business debt?

Business debt refers to the amount of money borrowed by a business to finance its operations, expansion, or other business-related activities. It can take various forms, including loans, credit card debt, and lines of credit. Business debt can be used to cover operational expenses, invest in growth opportunities, or finance large purchases.

Examples of Good and Bad Business Debt

Good business debt is used to extend the runway and help businesses make purchases that they couldn’t normally make if it makes them more competitive. For example, taking out a loan to invest in new equipment or hire new employees can be considered good debt. On the other hand, bad business debt is money spent without understanding how it impacts a business. For instance, using a credit card to cover operational expenses or fund day-to-day activities can be considered bad debt.

How Debt Affects Cash Flow

Debt can significantly impact a business’s cash flow, which is the lifeblood of any business. When a business takes on debt, it must make regular payments, including interest, which can reduce its cash flow. If not managed properly, debt can lead to cash flow problems, making it challenging for the business to meet its financial obligations. Therefore, it’s essential for small business owners to carefully consider their debt obligations and ensure they have a solid plan to manage their cash flow.

Assessing Your Debt Situation

Assessing your debt situation is crucial to understanding the extent of your business’s debt and developing a plan to manage it. Here are some steps to help you assess your debt situation:

Inventory your debt

Start by making a list of all your business debts, including loans, credit card debt, and lines of credit. Include the following information for each debt:

The amount borrowed
The interest rate
The repayment terms
The outstanding balance

Reviewing your debt inventory will help you understand the extent of your business’s debt and identify areas where you can improve your debt management.

Use these 13 ideas to reduce your small business debt:

1. Know your numbers.

Don’t just be familiar with your numbers — know them. Knowing them means that you know the cost of each of your raw materials, labor, rent or lease costs, and everything else. Do you know what each item costs down to the penny? Do you know the interest rate on each of your debts? If you don’t, you’re probably paying too much for something. Additionally, it’s crucial to understand how much debt your business carries and what constitutes manageable versus unsustainable debt.

2. Be smart about your ordering.

Sometimes, you stock a poor-margin item that gets people into your store, but as a general rule, if it’s not getting you to the margins that others in the industry report, it may not be worth your time. Sales that result in ultra-low margins are costing you money. Identify unprofitable sales and eliminate them or look for a lower price from suppliers.

3. Increase your margins to improve cash flow.

Speaking of margins, each industry has its own benchmark for what is considered strong margins. Do you know yours? Check with your industry trade group, but once you know it, make adjustments. You can raise your prices, lower your costs, or both. The goal should be to raise margins without raising your overhead expenses. What are others charging for the same item? Can you purchase more at a significantly lower cost without losing the savings to debt service?

4. Watch your inventory.

Like things in your refrigerator at home, some items tend to linger. Don’t put off ordering more of your popular inventory, but look for the product that isn’t selling and liquidate it. Understanding your existing debt is crucial when making these inventory decisions.

Inventory is probably where most of your money is tied up. You’re probably paying interest on that stale inventory that everybody forgot about. Don’t let it sit in your store unnoticed. Even if you move it at cost or for a small loss, liquidating is better than keeping the money tied up. Sell it online — eBay or Craigslist, for example.

5. Check your interest rates.

Take notice when you have an economic climate of low interest rates. Refinancing can lead to lower monthly payments, making debt repayment more manageable. If you have older debt, it’s time to renegotiate the terms.

6. Talk about the terms.

If you’re having trouble making payments, talk to the supplier about extending the terms. Automating debt payments ensures they are made promptly, helping you avoid penalties and manage your finances more effectively. You aren’t going to save any money, but lower payments may give you the financial room you need until the product sells.

7. Sell and lease back.

Do you have relatively new fleet vehicles or other larger items? Sometimes, it makes sense to sell the items and lease them back. Payments might be lower. To gauge the payoff that comes from this strategy, you will likely need help from a professional crunching the numbers.

8. Ask your employees.

You were an employee at some point. You know that the people on the front lines will see things that the managers may not. Your employees know where money is being wasted. Ask them. They may be skittish about telling you for fear of retaliation. Explain to them why you’re asking and maybe offer a bonus to anybody who helps the company save money.

9. Be tougher on your customers.

Don’t become that business owner that every customer hates, but do insist that customers meet their payment terms. You probably won’t go to battle if payment is a few days late, but when a couple of weeks go by, it’s time to start calling the customer to ask for payment. If late-paying customers are a big problem, you may want to add a late fee clause to agreements you have customers sign before you begin work for them. Check with your local professional advisors to find out if there are any laws that regulate what late fees you can charge. Good business relationships happen when both parties feel respected and valued.

10. Reduce staff.

Nobody likes to reduce staff, but if your business fails, the reduction in staff will be much larger. Sometimes, you have to make tough decisions that negatively impact the few to protect the many. Are there employees you could do without? Could you consolidate positions by paying one person more rather than paying benefits for two employees?

11. Speak to a credit counselor.

Most credit counselors are consumer based, but some work with small businesses. A debt restructuring firm can negotiate with creditors to modify existing credit agreements, making it easier to manage financial obligations. If you’re having trouble negotiating better terms, a credit counselor might be able to help.

12. Hire a debt restructuring firm.

Debt management companies come into your business and sniff out where you’re losing money unnecessarily. They may be expensive but worth it in the long run. The U.S. Small Business Administration (SBA) provides valuable insights and resources for managing small business debt.

13. Bring on an investor.

If things are really bad, an investor can offer an injection of cash often in exchange for a piece of your company. A small business owner must carefully weigh the responsibilities and risks associated with bringing on an investor, as it involves significant financial decisions. In general, avoiding this option is best since it involves signing away a portion of your future profits, but if times are really tough, it’s worth considering. However, finding investors is difficult. Don’t wait too long to start looking.

Bottom Line

Change what you can control. You have far more control over your expenses than your profits. You can’t make customers come through your doors, but you can reduce costs. Concentrate on cost reduction and put that money back into servicing your debt.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.