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Out of the Red: Strategies for Dealing with Burdensome Debt
Published on Apr 20, 2012
Read 'Out of the Red: Strategies for Dealing with Burdensome Debt' at 'Time to Start Up,' the small business blog by BizFilings.
It's a familiar movie scene. The slick executive strides into a packed conference room and wows the board with a graph projecting huge profits: A single diagonal line, going straight up.
Of course it usually turns out the projections are too good to be true and the slick exec falls on hard times and has to travel a long, winding road to redemption.
As in the movies, so too in life. Very few businesses will see nothing but boom years of increasing revenue and exploding profits. Every company will deal with challenging times, especially as it expands through trial and error. Maybe the pricing is off on a product, or building a customer base proves challenging. Maybe cyclical economic factors come into play or there's a shortage of a key component. Whatever the reason for a business' growing pains, a company's debt payments can turn into a seemingly insurmountable burden during hard times. However, there are some things you can do to handle commercial debt and regain a solid financial footing.
Change your business practices
There are a number of changes you can make in how your company operates to free up money that can be used to pay down debt:
• Freeze spending: You can't freeze all spending, of course. Wages and rent for your facilities will have to be paid. But if there's a non-essential project underway, consider putting it on hold. If there's a piece of equipment that's old but still functioning, use it a little longer than you would if cashflow was better. Changes like this will immediately free up some funds, and if your debt problems stem from expanding too quickly, this will put the brakes on.
• Liquidate assets: Just as you can't freeze all spending, you can't liquidate all assets. For example, if an asset is secured as loan collateral or is leased, it can't be put up for sale. However, you may have substantial unsecured assets that you can potentially turn into cash, which can be used to pay down debt.
• Find ways to save: This may take some creativity, but there are ways to accomplish essential business functions effectively for less money than you're currently spending. For example, you might be able to take better advantage of low-cost marketing channels like social media. Or you could redistribute tasks among current employees or bring on interns rather than hiring new workers.
It's possible that your debt issues cannot be resolved by simply changing your business practices. In this case, you may want to seek out financing and counseling.
• Commercial debt consolidation loan: Chances are you're making a variety of payments on different schedules to different lenders at various interest rates. A debt consolidation loan can streamline the payment process and offer you better terms than you're currently getting. It's important for you to assess your current debts, looking in particular at the interest rates and loan terms. Then you can shop around for a debt consolidation loan knowing what you're looking for: an interest rate lower than what you're paying on your current combined debts, and a loan term that is not substantially longer than your existing terms. Many organizations offer commercial debt consolidation loans, and the U.S. Small Business Administration guarantees consolidation loans through some lenders.
• Debt management company: Dealing with debt can be complicated and take too much of your time - time that could be spent innovating a better product or building a customer base. If your debt issues are especially complex, if your debt is particularly high or if your debt problems are intractable, you might want to hire a debt management company. A DMC will often take over managing the relationships with your creditors, including vendors, which means you don't have to field collection calls and can be confident that your suppliers will not cut you off. These companies can help restructure debt, advise on consolidation options and rescue your credit rating. Payment is usually not required up front, but is made as a percentage of payments on your debts or as a lump fee.
A debt counselor or management company can also help you formulate a long-term strategy to avoid debt problems in the future. This is not always possible, but seeking out necessary help is one sign of a well-run business, and your past decision to work with a counselor could look good if debt issues do arise again. A bank or other lender is more likely to offer good terms on a consolidation loan to a business that is well-run than one facing debt problems due to mismanagement.