Business Debt Management: Everything You Need to Know

The average US small business owner carries $195,000 of debt, according to a study by Experian. While some debt is necessary to run a successful business, expensive or excessive debt can crush your cash flow and even put you out of business. Here’s what you need to know about business debt and how to manage it.

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What is Business Debt?

Debt is money owed by one party to another. When you started your business, you might have needed to take out a loan for working capital, equipment, inventory or payroll. Forms of debt can be a loan from a bank, carrying a credit card balance, money borrowed from family and friends, and more.

However, if debt is negatively affecting your bottom line, there are ways to reduce it. Read on for ideas about how to eliminate expensive debt.

What Are Debt Management Plans?

A debt management plan is an agreement between a debtor (such as your business) and its creditors for the debtor to repay the amount owed in affordable installments. If you’re interested in a debt management plan, you must contact a third-party credit counseling agency to set one up for you.

Debt management programs can take the form of monthly minimum payments that line you up to slowly pay off your debts in the long term, often three to five years. Most importantly, they typically alleviate the burden of loan interest that can make monthly payments significantly more challenging.

Why Are Debt Management Plans Important?

In the event of poor small business debt management, a debt management plan helps you pay your bills in ways you couldn’t achieve alone, thus lessening the chances that your business will close. Additionally, proper business debt management means fewer negative impacts on your credit score and thus more funding opportunities, though you may lack access to credit cards while in a debt management program (more on this later).

Pros and Cons of Debt Management Plans

Debt management plans can be quite helpful when it comes to business debt management, but they’re not perfect. Below, we’ve outlined some pros and cons that small business owners like yourself should consider when it comes to debt management plans:

Pros of debt management plans

  • Simpler debt relief. Since you’re turning to a third-party credit counseling agency to plan your debt management, your debt repayment will be simpler. You won’t have to look through all your bills and figure out when to pay and how much to pay – your agency will handle all that for you. In fact, many agencies ask for one lump-sum monthly payment from you and then distribute it as needed to your creditors.
  • More knowledgeable debt relief. Your credit counseling agency won’t just plan your debt repayment. Their professionals will also educate you on debt management to help you avoid falling back into debt in the future. At every step of the repayment process, you’ll have an expert at your side to explain the steps being taken and reassure you that everything is on track.
  • More affordable debt relief. On a practical level, debt management plans are great because they lower your monthly payments and sometimes eliminate certain fees. This structure allows you to keep more money for other purposes, avoid spending extra on fees not directly related to your debt, and potentially finish paying your debts sooner than without a plan.
  • Consistent debt relief. When paying debts without professional help, it can be easy to lose track of the details or otherwise fall behind on payment. Since a debt management plan links you with a credit counselor whose job it is to keep you accountable, you won’t slip up on repayment and find yourself in an even deeper debt hole.

Cons of debt management plans

  • There are fees. Yes, even companies that help you pay less debt will charge fees for their work, which isn’t ideal when you’re in debt. However, credit counseling agency fees are often substantially lower than the fees that you’re struggling with already, and you may qualify for certain fee waivers or accommodations just for arranging debt payoff plans.
  • You’ll have less credit access. Debt management plans will require you to close any business credit cards that you’ll repay as part of your plan. Some creditors may also demand that your business not use any credit cards until your credit card debt is repaid.
  • Not all debts are covered. Secured debts (those with collateral attached) typically aren’t eligible for debt management plan inclusion. Some unsecured debts may also be ineligible for inclusion, thus potentially leaving your debt management plans right back at square one. Your credit counselor can identify which of your loans qualify.
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Tips to Help Eliminate Business Debt

Understand your current financial situation

The first step to getting a handle on your business debt is to understand where you stand. This can help you move forward and eliminate stress from being in the dark. Here are questions to ask to help you assess your financial situation:

  1. How are your profits?
  2. How much are you spending on inventory?
  3. How much are you making on products sold? (gross margin)
  4. How much money is left over?
  5. What’s your debt situation?
  6. Are your products selling?
  7. Do you have an emergency fund?

For a deep dive into each question and how to calculate the answers, visit the Bench Accounting blog: How to Know if Your Business is Financially Healthy.

Rework your budget

Your budget should be a “living document”. That is, it should evolve as market conditions change and other factors affect income and debt obligations. A budget takes a bit of time to set up and calculate but is important for financial management and business growth.

With the right template, this process can be easier and faster than you might imagine. Here’s a resource to get you started: Small Business Budget Templates for Download.

Cut costs & reduce expenses

This strategy can be difficult for a small business operating on a shoestring budget. However, there are tons of little expenses that add up. Reducing these obligations can be painless.

Here’s an article on cost cutting to help you manage debt: Don’t Forget These Sneaky Expenses When Starting Your Business. You’ll get information on how things like credit card processing and utilities can add up – and what you can do about it.

Reach out to creditors/lenders

Reach out to creditors and lenders to discuss a lower interest rate or an extended payment period. If you have a bank loan, you may be able to get more favorable terms or rates if you haven’t been late on payments and your business financials are in order.

For credit cards, you can consolidate and transfer balances to lower interest cards. If you’re going that route, be sure to keep an eye out for the dates that special offers end. Your interest rate can spike significantly.

Contact customers

If you offer a service, customers might let invoices go unpaid for an extended period of time. You don’t need to be aggressive or unfriendly when you ask customers to meet their payment terms. However, if a few weeks go by, call and ask for payment. If late paying customers are affecting your bottom line, you may want to add a late fee clause to agreements.

Consolidate loans

Consolidating high interest debt into a lower rate loan can be a huge money saver. In fact, SmartBiz customer Milton Martinez used this strategy by taking out a low-cost SBA loan. HE says, “By getting rid of two small loans I’m saving $15,000 – $18,000 dollars. That’s money I can put back into growing my business or into savings.”

Learn more about debt consolidation with an SBA loan on the SmartBiz Loans website: Refinance high interest debt and save thousands with a low-cost SBA loan. For more information about consolidating loans, review this post: Small Business Debt Consolidation Strategies.

Note that a good credit score is required. If you need to work on yours, the SmartBiz blog has a wealth of information. Visit the SmartBiz blog here for articles about personal and business credit and how they affect loan applications.

Increase your income

Believe it or not, there are only four ways to increase your revenue:

  • Increase the number of customers.
  • Increase the average transaction size.
  • Increase the frequency of transactions per customer.
  • Raise your prices.

Focusing on any of these approaches can increase your cash flow and income, perhaps substantially enough to give you more money with which to pay off your debts. You should also consider the cost of each approach: Acquiring new customers, for example, may cost five times as much as retaining current ones (and increasing these customers’ transactions size or frequency).

If you need assistance with any of these strategies, consider hiring an outside marketing professional. They can help develop a solid road map to increase your customer base and overall revenue.

Take inventory of your debt

Just as you can take an inventory of all your stock and raw supplies, you can list all your debts and their values in an organized manner that facilitates easier tracking and repayment. A table of debts with each debt’s total balance, interest rate or APR, and monthly payments can give you a much better sense of what you owe and help you plan your payments. Consider repaying your higher-balance or higher-rate loans first to more quickly relieve yourself of more debt.

Refinance high-cost debts

When you refinance high-cost debts, you open your company to lower interest rates. With the spare cash you can get from steering your company away from the highest possible interest rate, freeing your company of debt becomes a quicker, more realistic prospect.

On this front, SBA 7(a) loans can help. You can use these loans, which are the “gold standard” in small business lending, to refinance any debts for which you haven’t put up real estate as collateral. Such debts could include cash advances, equipment leases, and business loans. You can also use them to refinance one of your most expensive high-cost debts: your commercial real estate mortgage.

Shorten payment terms with clients

Perhaps you’re in debt because your cash flow is poor. Put another way, perhaps you’re struggling to pay your bills because you’re not getting money from your clients quickly enough to cover your needs. That’s why, to minimize your debts, it may be helpful to identify clients whom you’ve given needlessly long payment terms and work to shorten these terms. With shorter terms, you’ll get cash sooner, meaning that you can pay off your loans more quickly.

Not All Debt is Bad Debt

Note that business owners don’t need to completely avoid debt. They need to embrace the right kind of debt that can help their business expand and save money. For more information, review this article from the SmartBiz Small Business Blog: Debt Can Be Good for Your Small Business.

See Where You Stand

If you’re seeking a low-cost SBA loan, it’s a great idea to know where you stand before you apply. SmartBiz Advisor is an easy-to-use online tool specifically designed for those interested in a low-cost SBA loan.

Just like a CFO in a large business, SmartBiz Advisor can help you learn how to build your lending profile by educating you about financial factors banks consider. SmartBiz Advisor generates your unique Loan Ready Score and offers suggestions to improve your score if needed.

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