Having The Right Answers When Debt Comes Calling
Debt is a given when it comes to running a small business. It can be a necessary tool when starting, expanding, or simply managing your day-to-day business operations. Yet for many small business owners, financial obligations outside your control, such as student loans, a mortgage, or an unexpected personal expense can take you further into the red than you had intended.
Often there comes a point when your collective debts begin to undermine your ability to run your business. With debt overload, the problems can be attributed to a number of common poor practices, such as bad credit management, poor cash flow, and personal use of business funds.
But there are ways you can mitigate your risk before debt becomes an insurmountable setback. To guarantee the overall financial health of your business, it’s vital to know there are several options available for paying down business debt effectively.
Improve cash flow practices
Many small business owners do a poor job of tracking money flowing in and out. The good news is there are a number of very capable online accounting programs that can be linked to your bank account to automate many cash flow processes. Some will scan and read invoices and enter them into your program for payment. This type of efficiency will help you understand the exact status of your cash balance at any given time, as well as help you prioritize payments based on the importance of the suppliers and/or overdue invoices.
At the same time, it’s a good idea to constantly monitor your receivables to see which customers pay promptly, and which are more problematic. Once again, software can do the job of printing reports that will itemize the age of your receivables. Where customers are taking a longer than normal time to pay, consider factoring your receivables or offering a discount to encourage faster payment.
Slow-moving inventory can tie up a lot of cash that could be applied to other needs. Consider offering a price reduction on those items. Your profit may be less, but the cash in hand will help pay your debts. Also bear in mind that discounting products may attract more sales, so although you may realize less profit per unit, overall profits may improve.
One important rule of thumb to keep in mind: set up a credit line before you need it. It’s never a good idea to look for additional funding when a fiscal emergency strikes. If a credit line is set up ahead of time, there will always be a source of funds at the ready should you need it.
Before incurring an expense and going into debt, reach out to accountants, bankers and your regional Chamber of Commerce to determine what government grants are available. Employment and technology grants for example, can be very helpful in improving your cash flow.
Lower business expenses
This might seem an obvious piece of advice, but the question lies in where to begin. The first step is to conduct a thorough review of all of your expenses. You might be surprised at some of the expenses or the amounts that come up in your assessment. When you have your list, determine which can be reduced or eliminated until you get back on track.
A common discretionary expense to consider is marketing. Ask yourself, are you spending too much money for marketing items? Are there other less costly (or free) marketing strategies that you can leverage? In order make the right marketing choices, it would be wise to spend time analyzing which of your marketing expenses are generating sales.
If you are renting an office space, you might consider subletting any extra space to generate additional income. Conversely, if you’re not tied to a current lease, consider shared workspace facilities that include all the necessary administrative support and services at a fraction of the cost.
One item you may not have considered is your interest and financing expenses. Take the time to review your various financing charges and the interest rate paid. If there are a lot of charges for credit card interest and fees, consider switching to a no-fee or low interest card. Or work with your financial services provider to consolidate those debts at a lower interest rate. Your assets could be used as security to help you get a loan at a lower interest rate. With less cash allocated to interest, your debt can be eliminated more quickly.
While it can be painful, you may also need to reduce your head count. Can you afford to keep everyone you have on staff? Alternatively, can you lower the number of hours they work, bearing in mind it will likely mean you having to take on extra work? At the same time, ensure that any salary to yourself is the minimum amount required for your own living expenses. Also, consider your personal expenses as well as your business ones. The lower you can get your loans outside of work, the less you will need to withdraw cash from your business.
Don’t be afraid to ask suppliers for discounts or volume rebates. You might be surprised at how accommodating they can be.
Communicate with creditors and lenders
When you’re tight for cash, talk to your suppliers to work out a payment plan. Creditors are usually open to working with businesses when they are struggling, in the hopes that building some goodwill will pay off over the long term. Besides, they know that if you go into bankruptcy, they will only be able to recover a small amount. Even if they charge interest, it will be much lower than credit card debt.
One thing to consider however is that suppliers may limit new purchases made with them, so consider whether the limits will have a negative impact on your operations.
Another option may be small business loans guaranteed by the government. There are several available that are designed specifically to help small businesses obtain funding. Since the banks are required to assess your repayment ability on the same basis as a regular loan, it is best to apply for these loans before you get into financial trouble
If you are already in financial trouble, then look at consolidation loans. While they help to alleviate multiple debts and higher interest rates, banks may stipulate limits on new spending. Before any consolidation, talk to a tax professional to ensure you’re not missing tax savings opportunities. For example, interest on student loans can be deductible if they meet specific criteria. A loan consolidation would eliminate your ability to deduct that interest.
Work with a debt-restructuring company
When all else fails, there are firms that can help you in tackling the above-mentioned items and if necessary, put forward a proposal with your creditors, including bankruptcy proceedings. The company and your accountant can determine whether your business is worth saving and what steps must be done to turn around your business.
If it comes to bankruptcy proceedings, be open about your financial situation. This may however affect your credit rating and ability to take on more credit for several years into the future.
If you apply some common-sense practices and stay proactive in managing your debt, hopefully you shouldn’t have to come to this stage.
Mahyar Hansotia is President of Sobel & Company, Professional Corporation, which is focused on business owners of small- to mid-sized companies, as well as large corporations, who are looking for financial acumen and strategic business expertise over and above traditional chartered professional accountant services. For more information Mahyar Hansotia can be reached at [email protected]