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The Business Owner’s Ultimate Guide to Getting Out of Debt

The worst four-letter word when it comes to your small business should be “debt.” Nothing can keep you awake at night and hold you back from your business’s true potential like being in debt.

If you have a habit of covering expenses on the company credit card, or are taking out more and more loans to make ends meet, chances are you should be refocusing your efforts on being debt-free and not purchasing the plush commodities you’ve always wanted as a business owner.

There are instances where taking out a small business loan is definitely a good choice. A recent ProOpinion survey showed that 18% of respondents agreed that taking out a loan to buy new equipment was an adequate reason in the right circumstances. 17% of respondents agreed that taking out a loan to build credit for the future was also acceptable in the right circumstances. But going into debt is always a risky endeavour.

Getting out of debt can be even more intimidating. Even if you’ve handled your personal finances quite well and are debt-free yourself, the kind of money you can end up owing with several hundreds of thousands invested in your business can be daunting.

Fortunately, there is a way to dig yourself out of a debt hole, should you find yourself in one. This is the business owner’s ultimate guide to getting out of debt.

Understand Your Debt

The first thing you must do if you want to become debt-free is to take a good look at your financial situation and determine what debt is good and what debt is bad. Paul Esajian of Fortune Builders differentiates between the two in this way: “Any debt that is used to add value to your business or increase revenue can be seen as good debt. Bad debt is taking on credit that does nothing to grow your business.”

Taking out a startup loan to purchase enough inventory to begin your business journey is an example of good debt. Swiping the company plastic for an expensive coffee machine for your company’s break room – although it can lead to happier employees – is an example of bad debt. You should make the decision not to use credit to purchase anything that will not add value to your business, or your debts will continue to stack up.

Of course, the ultimate goal is to get out from under all your debt. Dividing it into “good” and “bad” will simply help you find a starting point.

Come Up With a Plan

Once you have committed to getting out of debt, the next step is to prioritize your debts. Some of them will inevitably be more pressing to resolve than others.

For instance, focus on repaying loans which have higher interest rates over ones with lower interest rates. This will save you money in the long run: decreasing the time you pay on a loan will keep the interest in your pocket and out of your debtor’s bank account. Most likely this will take the form of credit card debt, which usually carries interest rates of over 15%.

Another priority for paying off debt is any debt which you yourself can be held responsible for. Entrepreneur writer Diana Ransom suggests that if “you've personally guaranteed any of your business's debt – meaning, if a creditor or supplier can come after your personal assets if you default – make sure paying off those debts becomes a high priority as well.”

After you’ve sifted through those priorities, begin what Dave Ramsey calls the “ Debt Snowball.” If you have several different loans at several different locations, focus on the smallest one first. Say you have four different loans you’re repaying at values of $1,000, $3,000, $5,000, and $100,000. You’re making monthly payments on each. To get out of debt quickly and efficiently, pour extra resources into paying off the $1,000 loan faster by paying more than the minimum payment required.

Then focus on the $3,000 loan, pouring in all the extra resources you had been putting into the smaller loan plus the minimum you were paying on the $3,000 loan. By the time you reach the $100,000 loan, you will be paying its minimum requirement in addition to all the extra money you’re no longer spending on the smaller loans. Thus you snowball your efforts.

Cut the Fluff

In a recent ProOpinion survey, 39% of survey respondents said that “cutting costs”was the most impactful thing a small business owner could do to get out of debt. Without a doubt, if given the choice between paying off debt sooner by living a more spartan lifestyle or paying off debt later by enjoying a few more luxuries, always choose the first option.

You can go without a regal leather desk chair if it means getting out of debt sooner. To do this, Debt.org suggests finding ways to capitalize on resources you already have, such as subleasing unused space or selling unused office equipment.

If this isn’t an option for you, consider tweaking your technology or prices to accommodate your debt. “If customers aren't paying on time or your expenses are too high, consider ramping up collections efforts and ditching unnecessary expenses such as office space or costly phone systems,” says Ransom.

The bottom line requires you to pour as much extra money into getting out of debt as possible. It may be time to buy the generic form of your favorite name-brand item for a while.

Increase Cash Flow

“If only I were to come into some sudden money, then I could get out of debt quickly,” some think. For most people, this is not an option. Waiting around for debt to clear itself is a sure way to fail.

Instead, a slow and steady pace of pouring in extra cash flow will do the trick. Putting a steady stream of money toward your debt, whether from tax breaks you received this year or from an extra job, is how businesses truly become debt-free.

Zoho recommends three different ways to increase cash flow to put towards debt. The first is to increase the productivity of your business. Actions like giving your employees more training, beefing up the technology in your company, and trying new marketing strategies can be a great way to increase profits. “Granted, this may increase costs in the short term, but a well-thought-out marketing plan can increase your profits, which in turn, can be used to pay down debt,” Zoho writes.

You will have to balance these tradeoffs with “Cutting the Fluff” mentioned above, but as long as you can see tangible gains from your efforts, increasing efficiency is a great strategy.

Zoho’s second recommendation is to renegotiate terms with vendors. Shop around to ensure you are finding the best deals. Many times, Zoho states, “suppliers will offer payment terms of 15, 30, 45 and even 60 days after the delivery of goods and services. Conversely, you may be able to negotiate an early payment discount – early payment discounts can be anywhere from two to ten percent.”

Third, Zoho recommends achieving maximum inventory turnover. When product is sitting in your possession for too long, you lose money. Purchase your inventory at the last minute and get rid of it as soon as possible to keep inventory costs low. In addition, try to “work with suppliers that offer consignment inventory or rights of return for unsold goods.”

Budget Again office-620822_1280.jpg

In order to stay out of debt, you must prevent the events which caused your debt in the first place. If you continue to pile on debt even as you’re digging your way out, it may be time to revisit the budget with a ruthless mentality.

You have to be willing to meet your business where it’s at, or as Ransom puts it, “create a budget based on the business’s current financial situation.” You may have to choose to avoid certain opportunities if you know they will increase your debt or decrease your cash flow to put towards debt. If you’re struggling with the bookkeeping side of things, accounting help such as QuickBooks or Peachtree can help you keep track of where your money is going.

Develop a Plan with Creditors

Oftentimes you can renegotiate the terms of your loans with creditors, who many times will work with you to settle your debt. According to Bench blog writer Jeanna Barrett, “sending loans to collections represents a huge loss for lenders, which means there’s a chance your lender will be flexible and accommodating about late fees, restructuring payments, and even renegotiating interest.”

You can also write a hardship letter explaining your circumstances. There are many options available to you to settle your debt simply by negotiation. Just be aware of one factor Barrett warns about: “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 Loans

Consolidating your loans can be very advantageous to you, especially if you don’t have enough cash flow to successfully pull off the “Debt Snowball” of paying off smaller debts first. Essentially, consolidating loans allows you to take several different loans with varying interest rates and turn them into one loan with one interest rate. The rate is typically lower but the lifespan of the loan lasts longer.

This allows you to lower your monthly payment, which can ease budget stress and allow you to pour more resources into getting out of debt. If you want to pursue loan consolidation, do your homework. Compare interest rates of what you are currently paying with what debt consolidators are offering. Not all consolidation options are the best, and consolidation is not always the best option.

In the end, you will wind up paying more money if you don’t tackle debt in the other ways described above, as outlined by Dave Ramsey’s financial team.

Know of any other important steps to getting out of debt? Let us know in the comments below:

Image Sources: Pixabay, Pixabay

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