The vast majority of small businesses need a loan to get started or take advantage of a growth opportunity. That’s all perfectly normal. But what if the amount of debt — not to mention all that pesky interest you’re paying — is causing you sleepless nights?
Then you’ll want to pay down that debt as fast as possible. Here’s how to go about it.
1. Can You Afford to Pay More?
The simplest solution would be to increase your payments, without changing anything else about your operations.
Take a look at your current budget, or update your old budget it you haven’t done that in a while. Current cash flow may be sufficient that you could put some more of it toward debt repayment. (Your Xendoo accountant can help you decide this.)
You might be surprised at the result. Sometimes what seems like a crushing burden isn’t really so bad once you get the numbers organized.
2. Reduce Debt by Working with Creditors
Creditors don’t want to send your account to collections, which will cost them a lot of money. They’d rather work with you to get the money paid, so don’t be afraid to give them a call.
Here are some ideas. Just bear in mind that some of them will impact your credit rating, so they’re best used if you’re not planning to apply for another loan within the year.
• Renegotiate loan terms with a lower interest rate, reduced late fees, restructured payments, etc.
• Renegotiate supplier contracts with a bigger discount for early payments or bulk buys, extended payment terms, etc.
• Read the fine print in loan terms: Sometimes an extra payment can be deducted from the capital (reducing the amount of interest you owe), or credited to a future payment when you might be short on cash.
• Get a debt consolidation loan, which transfers all your high-interest debt (bank loans, credit cards, etc.) into one low-interest payment plan. Beware, though, you may have to provide collateral or a personal guarantee.
• Let a debt restructuring company do all this for you. If you don’t feel comfortable negotiating with creditors, you can hire someone — for a fee — to act on your behalf.
3. Reduce Expenses
Now it’s time to go over your costs with a fine-tooth comb and eliminate areas of waste. Look at everything from the cost of materials and labor to office overhead and marketing. The goal is to free up more money to put toward your debt.
• Eliminate low margin products or services. If they aren’t generating enough revenue, they’re not worth the money and effort you’re putting into them.
• Streamline inventory. In general, merchandise shouldn’t sit on the shelf for more than 30 days. Improve cash flow by adjusting your purchase amounts. Look for suppliers that offer rights of return for unsold goods.
• Control labor costs. Avoid paying overtime by fine-tuning scheduling or converting to part-time employees. Cross-train employees to fill more than one role.
• Downsize your office space. Do you really need so much, or are you storing too much inventory and/or equipment? Is there another space available for lower rent?
• Lease expensive equipment rather than buy it. There are many factors to consider — including shelf life, maintenance needs, product selection and taxes — so be sure to discuss with your Xendoo accountant whether this would be a cost-effective strategy for you.
• Weed out unprofitable customers. When you were first starting up, you may have offered hefty discounts just to get some money coming in; tell those oldies that the free ride is over. Also cut loose the customers who are constantly late paying you, or demand too much time and attention for the amount of business they bring.
4. Increase Revenues
This may seem obvious, but more money coming in is more money to pay down your debt. Here are some ideas.
• Raise prices. Small businesses often fear to do this, in case they lose customers. But you’re entitled to a cost of living increase like everyone else.
• Cross-sell and upsell. Promote additional, related products and services with each sale, or put together bundles that entice customers to buy more.
• Add products or services to your line. What else do your current customers need? Or what new niches could you tap into with something similar to what you already offer?
• Liquidate unused assets, so you can at least get some money back out of them. Outdated office equipment can go on eBay or Craigslist. Excess or obsolete inventory can be sold to an inventory liquidator. Lease unused office space to another business.
• Take a second job. This is probably the last resort for small business owners who are already slammed with work. But it might be worth it for a few months just to get that debt monkey off your back.
5. Create a Debt Reduction Strategy and Timetable
Now that you’ve figured out how much extra money you can put into paying off your business debt, you can plan a payment strategy.
One option is to commit that money entirely to debt repayment and swear off making any other purchases until the debt is gone.
Another approach is to decide that you will pay a set percent of your profit to creditors every month.
Use that amount to calculate how many months it will take you to get out of debt (don’t forget to include interest). Put a big, happy note on your calendar at the month when you’ll be debt-free, as motivation to stick to the plan. As financial planning expert Gail Vaz Oxlade says, “If you don’t write it down, it’s a dream, not a goal.”
There are many more ways to get the business debt paid off faster, but not all of them will work for every business. Be sure to consult with your Xendoo CPA, who will go over your financials and help you make the right decisions. Won’t it feel great when you can go to sleep at night knowing that your finances are under control?