For example, debt can be used to hire employees, invest in new equipment, purchase new software for your business or acquire bigger office space. On the other hand, debt can be a problem for the small business owner if you fall into the trap of owing more than you can pay back.
Here are six things to do to alleviate and deal with your small business debt:
1. Evaluate the amount of debt you have. It's important to determine whether your debt could be discharged. Additionally, it allows you to find opportunities to renegotiate the amounts you owe. You'd be surprised how many small businesses have credit card, business debt, and various other loans, and not aware of the terms of that debt.
2. Make sure your signed loan documents are iron clad. In other words, have your debt contracts reviewed by your attorney. Unfortunately, many small businesses lack resources and can’t hire a business attorney to review their documents. You may have an opportunity to mitigate what you owe by going through the legal documents and make sure it's iron clad on your behalf. You want to make sure all the conditions you initially agreed to are being met, not only by you but also by the creditor.
3. Create a repayment schedule. Create a repayment schedule that lists the amount of debt, interest rate, terms and amortization schedule. You want to identify the true cash outlay for your loans and repayment requirements. Nowadays most businesses use auto pay in their bank accounts to repay the debt and may not be keeping track of their payments to their creditors.
4. Negotiate settlements of your debt with creditors based on your relationships. It's always important to create and build relationships with your creditors. If you have a good relationship with your creditors, they won't want you to go out of business. It's more work for them to handle your debt in court. Having a simple conversation with your creditor can alleviate their concern of you potentially going out of business and not paying the debt back.
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5. Develop a restructuring plan to alleviate the fear of your business being a “going concern” to your creditors. “Going concern” is an accounting term to describe if a business has adequate resources to continue operating. During the audit process, auditors are required to review the company's books and financial health to determine whether the business can continue to operate. This concept is important banks, creditors and investors because it allows them to make decisions to protect their investment and interest in the company. A going concern also refers to a company's ability to make enough money to stay afloat and not have to fall into bankruptcy. You don’t want your creditors worrying about whether you’ll stay in business. Your creditors may force you into bankruptcy if they believe that you don't have the adequate resources to pay back what you owe.
6. Sell your existing and obsolete inventory if possible. You could also add fixed assets to this list. I'm not advocating a fire sale, however, items sitting in warehouses, machines and vehicles in your possession are all things you can sell to create additional cashflow to either settle the debt or make your creditors happier.
Debt can be a very useful tool to start and grow your business. Don't shy away from using corporate debt or business debt. The secret is to identify how every dollar borrowed relates to additional revenue generated. For example, if you borrow $100, how much revenue should you expect in return?
Many small business owners unfortunately borrow money and don’t spend it on income producing activities. Everything you do should be income producing because that will dictate whether you can stay in business and avoid debt service issues. Consult your CPA and business attorney if you think creditors may push you into bankruptcy, or if you're having problems paying off your debt that you owe potential creditors.
About Ebong Eka
Ebong Eka is no stranger to the world of personal finance. As a certified public accountant and former professional basketball player he offers a fresh perspective to small business planning and executing. With over fifteen years of accounting, tax & small business experience with firms like PricewaterhouseCoopers, Deloitte & Touche and CohnReznick, Ebong provides practical money solutions tailored to the everyday person, the aspiring entrepreneur or the small business owner.
Ebong is the founder of EKAnomics, a sales, pricing and leadership firm. He is also the founder of Ericorp Consulting, Inc., a tax and management consulting firm. Ebong is the author of “Start Me Up! The-No-Business-Plan, Business Plan.”
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