Challenges for small businesses coping with debt
Risk is part of running a business. You can't easily plan for recession, natural disasters or other negative events, because if you take a too-cautious approach then you'll never succeed. But sometimes the odds will go against you.
If you find yourself unexpectedly further in debt than you'd like, don't panic. There are options available but they require action. If you sit back passively and wait for the worst to happen, it just might.
So take action. Manage what you owe before it becomes unmanageable. Here are some useful tips to help you take control of your debts.
Understand your situation and take action
If you’re facing increasing debt, take action instead of hoping for the best. If you fail to make payments on your debts, the consequences are often disastrous. They can include loss of employees, seizure of stock and costly court cases brought by your creditors. Potentially worse than that is the risk of government intervention. If you fail to pay the taxes you owe, the government will come after their money.
Depending on where you live in the world, governments have the authority to get their money any way they can. They can seize your business assets, help themselves to the contents of your bank account, declare you bankrupt and even take personal assets such as your house or car. Sometimes this can be done without even a court hearing.
So stay sharp and aware of your situation. Use good quality accounting software to keep a close eye on your outstanding debt and monthly payments. This information should be at your fingertips at all times.
After that, your priorities will depend on the type of business you run and how flexible your suppliers are willing to be. The following payment priorities are suggestions, but the actual order is for you to decide:
Good accounting software is vital here. Without it, you'll have little idea who, and how much, you're paying each month.
Renegotiate bank loan terms You may be able to renegotiate your bank loan so it's spread over a longer-term, to reduce the interest payments and also the monthly repayment cost. The bank may want to charge a higher rate due to the perceived increased risk of default, so you won't save as much money as you might like. Even so, this can give you some breathing space.
Discuss more favourable payment terms Talk to all your creditors. Explain the situation and make it clear you have a comprehensive plan for resolving it. Stay positive – tell them you want to pay in full but need to renegotiate terms for that to happen. They should understand that it's in their interest to accommodate your request. After all, if your business fails they'll get nothing back. Be proactive here. If you approach your creditors before they start chasing you for missed payments, they're more likely to take you seriously and agree to your terms. Increase your revenue Easier said than done, of course, but there are ways you can boost short-term revenue. By taking action, you could reduce your debt payments enough to get you back on track.
Reduce business costs: Five tips to consider
Think about where you can cut costs. Use accounting software to list your largest outgoings and see where you can make reductions. For example:
Be intelligent about where you cut costs
You might feel like you need to cut costs to the bone when debt looms over you, but sometimes it can be counter-productive. For example, consider the global economy. Some countries chose 'austerity' because of excessive debt – yet they suffered with more sluggish economies than those that tried government stimulus exercises (at least in the short term). There are different schools of economic thought about this, but don't assume cutting costs will automatically save you money. It's where and how you cut costs that matters. For example, if you slash your marketing budget you might save a lot of money in the short term, but you will lose potential new clients. Cut your shop floor space and you'll save rent, but reduce the range of stock you can display to customers. Make some of your staff redundant, and you won't be able to handle any larger contracts that come your way. Cut when you need to, but do it sensibly. Before you start, use accounting software to forecast the financial impacts of different cost-cutting options. Trim the fat out of your business, not the muscle.
Raise funds to pay your debts
This will be difficult. A new business that's free from debt is a better investment proposition than one that's having financial problems. Still, you have choices:
Be realistic about your options
More than a third of business owners are less than comfortable about their levels of debt, so you're not alone. Do everything you can to keep your business running, and talk to local business advisory agencies to see what help they can offer.
With luck and perseverance, you'll be able to turn your business around. But if things don't improve, you may have to consider closing your business and declaring bankruptcy. That would hurt, of course, but it doesn't have to be the end of your dreams.
Many entrepreneurs fail in business at least once before finding a successful strategy. And as long as you learn from the experience, you may be able to bounce back stronger next time.