Tips to Survive a Small Business Debt

Behind every business brainchild, there is a series of brainstorming, research, and surveys that eventually turned the concept into reality. However, in today’s competitive world, starting a new business is no less than a risky challenge.

Usually, businesses start off as a small sole trader organization and have to deal with numerous complicated issues. Not only there is an endless stream of administrative tasks but they also face a financial crunch. One of such problems which require immediate attention is surviving the debts before they break your back. It is not a hard nut to crack that newly-launched companies struggle with finances which can unwind a business in no time if left unattended. Even loans are hard to come by as the amounts are nominal while the returns required to be paid are high. This is why survival for small businesses becomes risky and statistics reveal that 50% of them fail within the first five years of their existence. They are forced to shut down due to solvency issues because expenses are high at first so debts pile up while liquidity is low due to longwinded cash flow.

Thus time and skills are required to manage finances or else even a profitable venture would go bankrupt. In order to avoid getting your small business close down in its early phases, it is essential to learn how to cope with debts. You cannot just leap into entrepreneurship without having some financial knowledge. You have to be realistic and ensure that your venture remains financially secure. Even though only 25% businesses make it beyond 15 years, but where there is a will there is a way. That is why we have compiled ways for small business owners to keep a steady footing when dealing with debts. The following tips would allow you to optimize your debt management, overcome business distress, and maximize your chances for success.

1. Consolidating or Refinancing Debt

One of the best ways to reduce the overall business debt is through refinancing an old loan. The distress of paying off the debt is put off as the refinancer provides you immediate funds to repay the old loan. It allows you to get another loan to pay off the old loan with newer terms and longer payback period. This gives you ample time to collect profits overtime to finally become debt-free. This method doesn’t immediately remove the debt. It just replaces it with a better alternative. It might be advantageous as you can get lower interest rates. All in all, it gives you more time to outlast the financial crunch!

Another option to manage finances and prevent insolvency is to consolidate multiple debts. It cuts down the number of creditors the business has to pay as they are accumulated into one account. It also reduces different lines of credit which lead to a beneficial change in payment terms and interest rates like refinancing.

2. Avoid Taking Loans from Loan Sharks

In many cases, small businesses fail because they take wrong decisions to finance them. The founder usually wants to expand at a faster rate and has no investment. So he/she starts looking for investors who are very hard to find on such short notices and small budgets. In distress and rush, they submit to loan sharks and agree to their expensive credits. These debts not only have a high cost of credit but also have complex covenants attached to them. The payment terms are also not advantageous and can be quite unreasonable. If you are in such a debt, repay it as soon as possible by finding other alternatives.

3. Turn toward Alternate Financing

All small businesses need to expand and at some point will require finance to back their growth. But you don’t have to burden yourself with debt. There are many alternative financing sources which are easier to manage. From SBA Business Loans and invoice factoring to peer-to-peer lending, there are many amazing funding measures that can save the day for your company. These have fewer restrictions, easier payment terms and are even less costly. You can even sell your share if you are fine with diluting your ownership for the sake of survival if things become too tough!

4. Cutting Down Unnecessary Expenditures

Extra expenses can go overboard at any stage in a business’s life and thus eat up your chances of progress. You might ignore them due to nominal amounts, but they can accumulate to huge numbers. You can easily pay off your debts with the amounts you save on them. The only problem is you don’t know where these unnecessary expenditures are hidden. For that, you have to go through all your business processes. Scrutinize all the costs and cut them wherever possible. Ensure that your purchasing methods are economical, your inventory system efficient, and overhead absorption effective. Inspect how each and every expense contributes to financial health. If you feel that a business can do without it, then get rid of it. Things might become inconvenient and you might have to rely on alternative buying strategies but it will all pay off in the long term. You might have to opt for cheaper Internet service now but these small savings will ultimately help you collect enough to get out of business debt.

Even employee satisfaction can save you loads as happy staff is more productive and brings more to business. You can also save on overheads by rewriting the budget to optimize future spending. In this way, funds can be made available for debts servicing. So to survive debts, even notice the difference between $120.47 and $120 as these 47 cents also matter. There is no such thing as “small money” when you are short of cash. So take every digit seriously and make sure all the leaks are plugged.

5. Increasing Business Earnings

This might sound the easiest way to get rid of debt as earnings bring more cash which will cover your liabilities. But this isn’t as simple as it sounds because business earnings require more cash to multiply growth. So you have to increase earning in such a way that it brings in more not only in terms of profit but also in terms of cash. They should boost cash flow instead of just increasing the revenue figure. So whichever method you use to raise income, ensure that its collection strategies are fine-tuned. This can be done by shortening your invoice collections. This would lead to quicker and more predictable cash flow which can help you break the cycle of debt.

The Final Word

Summing it up, debt management is indeed a critical factor that determines the future of a business. The debt might not seem big today, but leaving it unattended could leave you in shambles. Avoid such a drastic mistake and look after your finances at macro level to take your business to the next level of success.