Business Debt: How it Works and How to Find Relief

Managing business debt can be a tricky affair. When it’s used with an abundance of caution, debt can be a valuable growth tool. However, business circumstances can change, and your debt could potentially become a major burden that’s increasingly difficult to handle. If you’re tired of the business debt merry-go-round, check out these nine steps toward lifting the burden off your shoulders.

Is (More) Business Debt Right for You?

Assuming business-related debt can be a strategic decision that leads to long-term growth. For example, a business loan can help you expand your facilities or hire additional employees. A line of credit can enable you to purchase new equipment. When you proactively manage their debt, it simply becomes another cost of doing business.

However, sometimes businesses take on reasonable-sounding debt, but the ground rules change in the middle of the game. Let’s say you take out a business loan to add a new product offering. However, the development logistics become unfavorable, causing you to postpone or even completely shelve that opportunity.

Unfortunately, you must still pay off that business loan, and you won’t have that new product revenue to offset that increased debt. If you were already operating with a tight bottom line, this unfortunate occurrence could create a financially unworkable scenario.  

How a Business Debt Schedule Works

Before you can develop a plan to banish business debt, you need a big-picture look at all your company’s financial obligations. That’s where a business debt schedule can help.

When completely populated, this handy chart will help you quickly review your business’ overall financial situation and make timely payments. Creditors, lenders, and potential buyers will analyze this nuts-and-bolts information before deciding whether your business presents a favorable risk/reward picture.

A comprehensive business debt schedule should include your loans, contracts, notes payable, leases, and other longer-term payables. For each debt, include details such as the creditor, original debt amount, current balance, monthly payment, interest rate, and maturity date.If you pledged collateral to obtain a loan or other financing, such as your house or other assets, include that information as well.

Are Entrepreneurs Personally Liable for Business Debt?

If your financial obligations have surpassed your comfort level, you may wonder if you’re personally liable for business debt. The answer depends on your type of business organization.

If you’re a sole proprietor, you are definitely responsible for your business debts. This condition also applies to most partnership participants.

In contrast, a properly structured corporation and limited liability company (LLC) both protect their owners from personal liability for business debts.

Your Personal Guarantee = Business Debt Liability

Taking one simple action can make you personally liable for business debt. This common issue arises when a new business (or an established company with few assets) asks a lender for credit. If you’ve signed a lease, or bought materials or expensive equipment on terms, you may have encountered this issue.

The lender is aware that if the business fails (a common occurrence), the lender won’t be repaid. To cover its bases, the lender requires the business owner to personally repay the debt if the business can’t (or won’t) comply. Before the lender will agree to the loan, the business owner must show proof of asset ownership. These agreements are frequently known as “personal guarantees.”

5 Strategies to Get Out of Business Debt

Getting out of business debt takes creativity and determination. Consider adopting one (or more) of these strategies for getting the bills under control while you continue your business operations.

Increase Your Sales Numbers

Use several tactics to boost your business income. Add a new product or service offering, or identify a new market for an existing commodity. Look for ways to sell more products to existing customers. Raise your prices slightly while educating your customers on your products’ value. Invite existing customers to stock up before the price increase takes effect.

Tighten Up Your Payment Procedures

If your business income depends on accounts receivables, shorten your payment cycles to get money through the door more quickly. Offer discounts for upfront payments. Remind late-paying customers of their outstanding bills.  If necessary, initiate small business debt collection efforts through a collection agency.

Sell Off Surplus Furniture, Fixtures, and Equipment

If you’ve downsized your offices, or have unused fixtures and/or equipment, sell those surplus items and generate some extra cash. Craigslist and online yard sale groups are free sales platforms, although you’ll have to contend with no-shows as a part of doing business. Note that you can’t sell anything that you have designated as collateral on an existing debt.

Adopt More Money-Saving Strategies

Trim the fat on other business expenses. Consider canceling or freezing subscriptions and professional memberships. Eliminate advertising that has shown very little return. Talk with your vendors about negotiating reduced prices. Rent out an unused office, or cancel office expenses entirely by working remotely.

One often overlooked source of savings lies in your credit card processing costs. Consider renegotiating with your merchant service provider or shop around for a new payment processor. Payment Depot, for example, is known for helping merchants lower their credit card processing fees. In fact, some of our members have saved over $800 a month when they made switch. 

Speak with Your Creditors and Counselors

Advise your creditors and lenders of your financial situation, and inquire about a hardship plan with more beneficial payment terms. Remember, it’s in their best interest to cooperate, as that increases their chances of getting paid. Ask for budgeting assistance from your accountant. Or, obtain free counseling and business budgeting advice from non-profit associations such as the SCORE Association.

The Fastest Way to Pay Off Debt

In reality, there are numerous methods of paying down debt, some more successful than others. In 2016, Harvard Business Review researchers determined that the snowball method garnered the best results. In a nutshell, you’ll pay off your smallest debt first, regardless of its interest rate. At the same time, you’ll pay the minimum balance on all your other debts.

While you bask in your sense of accomplishment, tackle the second-smallest debt. As you watch each debt vanish, you’ll keep the momentum going, similar to a snowball rolling down a hill.

Alternative Business Debt Solutions

Maybe you’ve tried a combination of debt repayment strategies. But you haven’t made much progress, and the relentless interest is making matters worse. If so, take a look at three alternative debt solutions.

Business Debt Consolidation

Rolling all your business debts into one loan payment can enable you to decrease your total monthly cash outlay, and it won’t harm your credit. You may also be able to obtain a loan that contains a lower interest rate.

You’ll obtain this business debt consolidation loan through a debt consolidation business. The company will negotiate the loan terms, collect your payments, and send payoff funds to your former creditors. Note that a business debt consolidation loan may (or may not) be secured with your business assets.

Although getting a business debt consolidation loan may sound like the right answer, know that rolling your debt into one payment isn’t your overall goal. Instead, search for a loan that requires you to pay less total interest while offering decreased monthly payments and an extended payment timeline.

Business Debt Adjusters

If your business has experienced cash flow issues, you might have taken cash advances to keep the operation going. Although it initially seemed like a good solution, the super-high interest rates, endless fees, and mandatory daily payments often left you with even more cash problems.

Enter Business Debt Adjusters, a New Jersey-based firm that renegotiates or settles merchant cash advances for substantially reduced amounts. The company may be able to switch your business to a reduced fixed monthly payment, which can enable better cash flow and help you to establish a budget.

Business Debt Relief

The term “business debt relief” encompasses several different options for business owners who face huge amounts of debt. If you cannot possibly repay your unsecured debt within five years, or your total unpaid unsecured debt equals at least half of your gross income, you may be a debt relief program candidate.

Debt relief companies often work with creditors to lower clients’ payments by making changes in payment schedules or interest rates. Other creditors agree to a business debt settlement by accepting less than the full outstanding amount.

Although business debt relief may be a workable option, the industry contains unethical scammers who have no qualms about separating you from your money. It’s also possible that your debts could increase if you’re trapped in a poorly managed debt relief program. Before considering this option, do your homework and enlist the services of a reputable financial expert.

When You Can’t Pay It Off: What’s Next

If your business has overwhelming financial obligations, and you know you can’t pay them off, you must now come to grips with your business bad debt issues. First, your creditors may prepare to initiate legal action against you, the individual. The success of those efforts depends on your form of business organization, any personal repayment guarantees, and whether you choose the path of bankruptcy.

Filing for Bankruptcy

If you’re considering filing for bankruptcy, know that your type of debt dictates whether bankruptcy is the best option. In addition, understand that you can file for business or personal bankruptcy.

Personal property is treated differently in Chapter 7 and Chapter 13 bankruptcies. In addition, secured and unsecured debts, including your home, are regarded differently during bankruptcy proceedings. With so many factors at stake, it makes sense to consult with a small business attorney with real-world bankruptcy expertise.

Closing Your Business

Maybe you’ve concluded that closing your business is the best available option. If so, take steps to legally discontinue the business’ operation so your credit and reputation are not harmed. If you’re a sole proprietor, simply stop your business operations. If you do business as a corporation, partnership, or LLC, you must follow specific procedures to dissolve the business.

Notify appropriate government entities, and cancel your state or county licenses or permits. Pay off your debts and taxes, and notify your creditors and customers that you’ll be closing the doors.

Final Words

Do note, though that the above steps should be your last resort. As mentioned earlier, you can free up cash to pay off your business debt by finding ways to save. One area that you could look into is your credit card processing. Get in touch with Payment Depot today. We’ll analyze your merchant statement or proposal for free, and recommend ways that you can save.