Like many entrepreneurs, Adam Levy expected to do well with the music equipment company he started in 2002. Armed with an MBA and pile of money made in the late-nineties technology boom, he invested six figures in his new venture and waited to cash in.
Only things didn't go as planned.
His business partner, a music industry mastermind, abandoned ship within the first 18 months and the company floundered. Seven years later, Levy still wasn't making a living wage and was six figures in debt. Out of cash and out of choices, he filed Chapter 7 bankruptcy.
"If I had known then what I know now, I would have just cut my losses, swallowed my ego and moved on," says Levy, who's based in Hoboken, N.J. "I didn't and it almost cost me my marriage."
Slash Your Budget
Of course, declaring bankruptcy--which experts say should be a last resort--isn't the only way to stop the bleeding. Reducing your spending should be at the top of your list.
"Getting out of your office space is one big thing I've seen people do," says Dan Olszewski, director of the Weinert Center for Entrepreneurship at the University of Wisconsin School of Business. Same goes for trading in that gas-guzzling delivery truck for a smaller vehicle or selling off that five-figure color copier and learning to love Kinko's.
Before throwing in the towel, Levy tried a variation on this theme, closing down his warehouse in 2007 and instead working with a fulfillment center. Although not enough to make the business profitable, the move did save him $4,000 to $5,000 a month.
For Josh Barsch, who in 2001 "nearly drowned in debt" after launching StraightForward Media , a digital advertising agency, slashing personal expenses was key.
"[My wife and I] sold our house and moved to a cheaper one," says the Piedmont, S.D., entrepreneur, whose business now grosses more than $1 million annually. "We sold my car and shared my wife's. It was a dirty, painful and tearful process."
But it was an effective one: By reducing his personal overhead, Barsch was able to pay off tens of thousands of dollars in business credit card debt within three years.
Secure New Revenue Streams
Finding another source of income can make the difference between merely keeping creditors at bay and actively chipping away at debt.
"A lot of entrepreneurs start consulting on the side or get a second job that has nothing to with their business idea," Olszewski says.
That's what Levy did, returning to his technology roots in 2009 as a consultant. And on top of working full-time for her husband's fledgling agency, Barsch's wife took a part-time job as a schoolteacher, pouring all her income back into the business for several years.
When contemplating alternate sources of revenue to pay down debt, you may be tempted to tap your retirement funds. Financial experts caution against this.
"It's an incredible hit," says Elizabeth Mance, founder of Accountability Services , a Seattle-based accounting firm serving small businesses. "If you're under 59-and-a-half, you have to pay taxes on that money. Then you get hit with a 10 percent penalty."
Negotiate with Creditors
Striking a deal with banks, suppliers and other vendors to whom you owe money can not only buy you time to come up with the funds, it can save you tens of thousands of dollars.
"If you can show them a plan that at least has them getting back more than they would if you were to declare bankruptcy, they'd rather see that than see you walk away," Olszewski says.
Joey Coleman, who runs Design Symphony , a branding and marketing firm based in Washington, D.C., will attest to that.
During his first four years in business, Coleman racked up $70,000 in expenses on half a dozen credit cards, with interest rates averaging 30 percent. In 2008, he resolved to put 10 percent of every client payment he received toward his credit balance.
"I called some of the banks and asked, 'If I double the minimum payment, would you lower the interest rate?'" he says.
A number of banks agreed, and Coleman managed to pay off every last card balance within a year.
You don't have to go the negotiation route alone, however. Jordan Goodman , author of Master Your Debt: Slash Your Monthly Payments and Become Debt-Free, recommends working with a business debt settlement program like Corporate Turnaround .
"They'll settle with creditors for 50 cents on the dollar," he explained. "About 75 percent of businesses that sign up with them survive."
If, however, you've financed your business on personal credit cards, a non-profit credit counseling service like Cambridge Credit Counseling is the way to go, Goodman says. Besides working directly with the banks to lower your interest rates to below 10 percent, these agencies can help you rebuild your tainted credit.
Break Those Bad Financial Habits
Most entrepreneurs who've crawled out of the black hole of debt emerge with new and improved financial habits.
For Coleman, that's meant embracing a cash-only mindset.
"Any time I buy something for my business with a credit card, I schedule the payment from my bank account right away," he says. "For small purchases under $500, I use my business debit card. If you believe you need to buy it, you should be able to part with that money instantly."
For serial entrepreneur Matt Morris , whose companies have generated more than $20 million in the past 12 years, "The mantra is just track, track, track. Track sales, track expenses, track conversion numbers on the internet. What I've found in my career is that anytime I track the numbers, things improve."
As for Levy, the entrepreneur who declared bankruptcy, he used last year's consulting income to launch a new venture, the New York Spirits Awards , a low-overhead alcoholic beverage competition that's already profitable.
"I've come out scarred," he says, "but I've come out smarter."