Tips for Getting out of Business Debt
When your business needs funding, it might be necessary to apply for a loan or other type of financing. But debt has a downside. Once you borrow, getting out of business loan debt could slow growth or prevent you from borrowing again in the future.
“Debt can be an integral component to scaling your business, but it’s absolutely critical it’s used for the right reasons and in the right proportions,” said Mike Hennessy, founder of Harbor Crest Wealth Advisors.
We’ll help you understand how to responsibly use and repay financing so you can get your business out of debt.
- How to get out of business debt
- How debt can help or hurt your business
- Preventing a cycle of business loan debt
How to get out of business debt
Here are a few strategies to follow to get out of — and stay out of — business debt.
Reduce your recurring expenses.
You may be only spending on necessities if you have small business debt, but you could do an assessment and further cut costs. You could limit hiring to avoid putting too many people on your payroll, especially if your business is seasonal. It may be more affordable to pay a small staff for overtime during the busy season than hire too many employees who won’t be needed when business slows down, said Ryan Bayonnet, founder of Hyland Financial Planning.
If possible, you could have employees work from home so you can rent a smaller office space or forgo renting an office altogether. Also consider trimming business luxury expenses, like traveling and dining. Cutting your spending wherever possible would free up cash to pay down debt.
Look for opportunities to refinance.
Refinancing a business loan could lower your monthly payments and reduce your interest rate. You could go back to your original lender or a different one to apply for a new loan that would pay off your existing debt.
However, you’d likely only secure better rates and terms if your business is in better shape than it was when you first applied for financing. If you’ve improved your credit score or increased revenue, refinancing could be a viable option for reducing your business debt.
“A lot of that can be renegotiated when you build up credibility,” Bayonnet said. “As your business gets stronger, lending gets easier.”
You could also consolidate debt to reduce your liability. Business debt consolidation involves rolling all existing debts into one new loan and making a single monthly payment. Like refinancing, consolidating debt could provide more favorable rates and terms.
Now that you’ve taken stock of your debts and fixed expenses and have a better idea of how you plan to manage them, it’s time to look at ways you can bring in additional income. Generating additional positive cash flow could be more difficult to achieve at a time when you’re cutting back, but you could take the following steps:
- Shed excess inventory.
- Raise prices.
- Shorten your payment terms with customers.
- Ask your own suppliers for longer terms.
How debt can help or hurt your business
Borrowing responsibly and spending wisely could allow you to reach business goals that you may not otherwise achieve without a financial boost. Business financing products are designed to meet specific needs for a variety of businesses.
“At the end of the day, these are just tools to help you accomplish what you need to do,” Hennessy said.
But, as mentioned earlier, debt that spirals out of control could prevent your business from being able to cover other obligations, especially if there’s a change in income.
The effects of business debt could spill over into your personal finances as well. Lenders that asked you to provide a personal guarantee to secure business financing will put you on the hook to repay debt if the business defaults.
“Your personal financial situation and your small business financial situation do not exist in a vacuum,” Hennessy said. “Given this crossover, it’s critical to understand how your personal financial situation would be affected by the worst-case scenario of your business failure.”
Preventing a cycle of business loan debt
Once your company begins to tackle existing business loan debt, there are steps you can take to make sure you stay on top of things. It’s always a good time to get business debt advice. The National Foundation for Credit Counseling not only helps consumers, it provides financial coaching to small business owners. Here are some additional steps you can take:
Fix underlying problems.
It may be tempting to treat business loan debt with more debt. But if the business has struggled and you take out a loan as a reprieve without addressing the root cause of your issues, you could be headed toward a debt cycle. You may end up worsening the problem while adding to your liabilities.
“You don’t want to use debt to treat a symptom in your business,” Hennessy said. Instead, determine if problems are related to people or processes, then create a plan to fix it. Only then is it a good idea to take on additional debt to increase the return on investment (ROI) of the improvements you made to the business.
“Debt utilization should fit into a well-developed business plan and serve a particular purpose within a repeatable process with measurable ROI,” he said.
Ask yourself why you need a loan.
Before taking out a new loan, think through the reasoning behind your decision. If you know you need outside money to grow a certain aspect of your operation to reach a particular revenue goal, then a loan could help you get there.
“Pause, breathe and review where you want to go,” Hennessy said.
Make sure the business would generate enough income to support loan payments. Take a look at your income statement before borrowing money to see if the business is heading in the right direction. Your income statement would indicate whether revenue is growing faster than your expenses, in which case the business should be able to handle new debt.