Small Business Debt Issues and How to Effectively Control Them
by Carrie Hinkel on December 5th, 2007
It takes more money to start a business than most entrepreneurs initially realize. This leads to increased debt and, for many, bankruptcy. In 2006, approximately 1.9 million American businesses filed for bankruptcy. For most companies, this is never a good option. It ruins your credit, makes it next to impossible to ever get another loan, and it may be difficult to gain back the trust of customers, clients and employees. But, don’t worry; there are plenty of good options for any debt-ridden business to keep afloat and start to manage their finances properly.
Common debt issues small businesses face:
Too many monthly payments - With several credit card bills, loans, mortgage or rent, utilities, phones, fax, internet and a variety of services billing you each month, it’s easy to feel overwhelmed!
High interest rates - Many small businesses are solely financed on credit cards. Of course, they plan on paying them off quickly; but it doesn’t always happen that way and those double-digit interest rates can quickly eat up any profits.
Unnecessary expenses - When a small business is drowning in debt, expenses that were once a "good idea" can quickly turn into a serious drain on finances. Here are some examples: paying a monthly fee to a marketing company, having too many phone lines or cell phones, expensive mailing campaigns, 24-hour-a-day tech support. In a financial crisis, all your business expenses should be carefully examined. Trim everything that isn’t absolutely necessary. Once your business is back on track you can re-examine these, but for now the future of your business may very well be at stake.
Too much advertising - Advertising is a good thing – when it works. If your business is suffering from debt, your advertising methods may not be working. It’s easy for a small business’ Google Adwords campaign to be in the $500-$1000 monthly cost range. If you are in too much debt, consider seriously cutting down your campaign and making sure what you keep is actually working. The same goes for print or email campaigns. Evaluate everything, and trim most of your campaigns down, at least until your company’s finances are under control. Think of it this way – if your current advertising campaign was really working then you wouldn’t be in so much debt!
How to manage your business’ debt and slowly get out from under it:
On your own - If you were able to gain some cash flow by trimming your expenses, great! Now, don’t go out and buy a fancy new laptop – pay off your debt! Start with the highest interest loans first – which are usually the credit cards. If you feel that you were able to gain enough cash flow to considerably put a dent in your debt every month, then you should begin to pay off each loan, one at a time. If you think having that extra cash in your account will be too tempting to spend, then set up an automatic transfer from your bank account to the loan.
Get a small business loan - You may be wondering, why another loan? Well, if your current loans are high interest, then getting a single low-interest loan could pay off all your high-interest loans and save you a considerable amount of money each month. However, this only makes sense if you are able to get a small business loan and if your current loans have a higher interest than the ones you would qualify for. Do the research first and see if this option makes sense for your company’s situation.
Work with a debt consolidation program - For those with several high interest loans, this program combines all your debts into one monthly payment and stretches the term of the loan out, so that payments are smaller. This option can really help to get a business back on its feet, and may even provide you with some leftover money at the end of the month to start growing your business again.
So, if your business is barely scraping by, there are plenty of ways to get it back on track. Just be sure you learned from your debt-happy mistakes and keep future expenses to a minimum.