Business debt can help in your startup efforts, and it can get the first employees hired. When business debt grows too large, especially high-interest credit card debt, it can stifle your cash flow and might force you to file for bankruptcy or close your doors.
At Punch Associates, consultants to consumers and business owners with debt issues, we field a lot of calls about how to eliminate business debt. The following is some information on how to begin the debt-reduction process.
Assess Your Debt and Budget
If the debt is too overwhelming, it is time to re-assess your business budget and the debt. Important considerations are debt balances and interest rates. According to Nerdwallet, all debt must be considered, including business loans, business credit cards, lines of credit and supplier payments you currently owe.
Prioritize Debt Pay Off
It is really important to decide which debts to pay off first. Obviously, paying off the high-interest debts, such as business credit cards needs to be a priority. As is true of their consumer cousins, business credit cards tend to have double-digit interest rates these days. Paying that debt off quickly means you are saving quite a bit in interest rate costs.
According to Inc. Magazine, you also will need to consider paying off your suppliers first because you are counting on their extension of credit as a necessary convenience in running your business smoothly.
Also, Nolo Press suggests that business owners consider which of the debt you are personally liable for and which you are not. Sometimes, business owners aren’t even aware of the personal liability clause they signed when they applied for their business credit card. Sole proprietors and partners are personally liable for all of their business debts, so Nolo suggests you make paying down such debt a priority.
Boost Sales
Nerdwallet recommends steps such as beginning a customer loyalty program, creating a greater social media presence and possibly even raising prices may help increase income. In the case of the latter, they suggest regularity in posting on social media, answering questions quickly and checking your Yelp.
Eliminate Unnecessary Expenses
Nerdwallet suggests selling equipment that ended up not being used because you can rent it when you need it. One of their unique ideas was to either choose a smaller office space or use co-working arrangements. Interestingly, co-working arrangements can lead to sharing of resources and workers between businesses, saving money.
Reduce the Interest Rate of Debt
Entrepreneur Magazine advises business owners struggling with debt to consolidate their loans into lower interest debt in order to attack the principle rather than keep paying high-interest fees. There are two main ways to do this:
Zero-interest, balance transfer credit cards: If you still have good business credit, you can apply for a lower interest rate business credit card and consolidate high-interest debt there. This is a good strategy if you can pay off the debt in the 12- to the 18-month grace period. All of the money you paid in interest can directly pay off the principal.
Debt consolidation loan: If you have more business debt than you can pay off in a year and a half, then a debt consolidation loan would allow you to combine debts and make one, lower-interest payment each month. This would allow you to get relief on the interest rates, make higher payments that directly attack the principle and have a definite timeline to have your business debt-free.
Nerdwallet urges all startups to be debt-free within the first year.
At Punch Associates, contact us for solutions if your business is struggling with heavy debt
