6 Ways to Dig Out of Debt
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With lenders tightening the reins on borrowers and prices for everything from materials to health care on the rise, many small-business owners are straining under the weight of growing debt.
Last month, 8,113 businesses nationwide filed for bankruptcy protection--a 57 percent increase from the same time a year ago, according to Automated Access to Court Electronic Records, an Oklahoma City bankruptcy data and management company.
Certainly, bankruptcy is one route small-business owners can take to salvage their companies, but such a move comes at a steep price. The attorney and court filing fees alone can add up to $8,000 or $9,000, says Charles J. Schneider, a small-business bankruptcy attorney, Livonia, Mich. Then there's also the long-term damage that bankruptcy causes to both the business and the owner's personal credit scores.
To avoid a similar fate, here are some ways small businesses can dig out of debt without filing for bankruptcy:
- Cut unnecessary costs and free up cash
Identify the parts of the business that got the company into debt in the first place and attack them head on, says Ken Thomson, co-founder of Biz911, a small-business debt management firm in Wilmington, Del., and author of "The Battle Scarred Guide to Small Business Debt Relief and Recovery." If customers aren't paying on time or your expenses are too high, consider ramping up collections efforts and ditching unnecessary expenses such as office space or costly phone systems. Another way to free up cash: Sell off unused equipment or scrap, he says.
- Revisit the budget
If the debt keeps piling up, then it probably means the company's current budget isn't really working out. Create a budget based on the business's current financial situation. Make sure your business's revenues can more than cover your fixed monthly costs like rent and utility bills. Then, allot a portion of the budget for variable costs, such as manufacturing materials. Julie Welch, a financial planner and accountant in Kansas City, Mo., adds that business owners should devote much of what's left to paying down their debts. If you have credit-card debt, for example, make sure you pay off more than just the minimum. Otherwise, she says, your debt will keep building and it'll take years to pay off. An inexpensive way to help you keep track of your budget is to use accounting software like Intuit's QuickBooks or Quicken, Sage Software's Peachtree, Sageworks' ProfitCents, MS Money or, web-based programs, such as NetBooks.
- Prioritize debt payments
Tackle the business's highest-interest rate debt first, advises Jerry Silberman, chief executive of Corporate Turnaround, a small-business debt restructuring firm in Paramus, N.J. Most likely that will mean concentrating your energies on paying down credit cards. However, if you've personally guaranteed any of your business's debt--meaning, if a creditor or supplier can come after your personal assets if you default--make sure paying off those debts become a high priority as well, he says.
- Speak with creditors
"Tell [your creditors] the financial situation you're in and the hardship the business is going through," says Silberman. Then, ask if they have a hardship plan that may provide better payment terms. If the creditor doesn't offer one, request a payment plan or a reduced settlement amount. Make it clear--without being demanding--that "the less they're willing to accept or the more they're willing to reduce your debt, the faster you will pay them," he says. Just make sure you can fulfill your end of the bargain. The worst thing a business owner can do is set up a repayment plan with a creditor and default, he says.
- Consolidate your loans
Consolidating your loans into one payment allows you to reduce monthly costs without harming your credit, says Thomson. The best-case scenario is consolidating several shorter-term loans into one long-term package.
- Seek Counsel
Negotiating with creditors can be a harrowing experience. If creditors are unwilling to work with you, enlist the help of a credit counseling organization. While these nonprofit organizations typically offer debt-management help only to consumers, some--such as the Fort Lauderdale, Fla.,-based Consolidated Credit Counseling Services and the Richboro, Pa., Credit Counseling Center --will work with small-business owners. But for more complicated business debt issues, Joan Reading, president of the Credit Counseling Center, recommends seeking a bankruptcy attorney's advice.
Another alternative is to contact a professional debt-management company like Corporate Turnaround. These companies can help sniff out inefficiencies and negotiate better payment terms with creditors. Just be cautious as there are plenty of scammers out there. To know you're working with a legitimate debt-turnaround company, look for accreditations from the United States Organization for Bankruptcy Alternatives or the Turnaround Management Association. (Also, keep in mind that these companies generally charge a fee and they may require you to already be in default on several loans before they'll step in.)