5 Strategies for Reducing Overall Business Debt
It's all about finding a healthy balance in today's economy.
A healthier bottom line is what every company strives for, and maintaining an active focus and strategy on managing financial debt is a critical factor in reaching that goal. As I counsel my clients, "debt" need not be a dirty word — it’s a healthy part of any sustaining enterprise when leveraged appropriately. Reducing debt and, by extension, its potential for an adverse impact on company stability should always be top of mind for business leaders. These are the considerations I always recommend for my clients to pursue towards that end.
1. Renegotiate and restructure loans with existing lenders
This is an option that is not commonly known and rarely communicated by debt servicing agencies, but plausible for businesses of all sizes to pursue. In all cases, lenders are making the same considerations as other business owners. Retaining clients through difficult periods via margin reduction on servicing costs is generally preferrable to having a loan in default or passed to a collection agency with an indeterminate outcome. In certain cases, additional context may be needed to explain to the lender the negative impact that current fees or loan terms have on the solvency of the borrowing company (sometimes called a "Hardship Letter’). Outcomes may include reversing or reducing administrative fees, lowering interest rates or changing payment schedules — all of which can be beneficial.
2. Consolidate and reduce servicing costs to a more favorable loan
Assessing ways to alleviate a company's debt is a very viable option, depending on if the terms are favorable and any additional administrative or termination/setup fees do not introduce new, short-term burdens. One recommended option for small businesses is the 7(a) loan program from the Small Business Administration (SBA), which has very straightforward qualification criteria (that may be more stringent than other lenders) and an application process that can be more intricate, but with compelling rates and the benefit of being able to be serviced via local lenders with the SBA providing the guarantee. A business line of credit (something also offered via the SBA) can be another attractive option with favorable rates and longer payment terms than traditional lines of credit.
Related: SBA Loans: A Primer
3. Pursue grants as an option to transfer debt
Grants or similar forgivable loans should not be overlooked as options to offset debt. In addition to highly publicized grants launched in reaction to exigent circumstances (like the current pandemic), there are numerous ongoing grants available that are applicable to nearly every business segment. These grants may come from both national and regional economic development groups, as well as nonprofit or other non-governmental industry agencies. As these grants can sometimes be narrowly focused on support for a specific region and/or industry segment, reading the fine print on applicability is a must.
4. Manage accounts receivable
A dedicated focus on collecting outstanding payments owed to your company is critical to assuring a healthy financial baseline for continued operations. Enforcing shorter payment terms (for example, net 30 days as opposed to net 90 days) can provide additional certainty into the state of company finances. While renegotiating payments for established clients can be infeasible, there may be opportunities to consider prompt pay discounts or leverage a certified receivable company willing to provide 85% or greater of the amount owed upfront and take on the burden (and risk) of delayed payments.
Be mindful of the balance of long-term client retention and your company’s opportunities to "pay it forward" and garner loyalty by allowing for reasonable flexibility with payment terms for clients also facing challenges in the current business environment.
5. Find creative options with your vendors and suppliers
Where your company debt is being directed to support expansion, inventory or services from suppliers, consider finding deferred payment arrangements with these entities. These models can include risk-sharing arrangements with payments based on downstream conclusion of the service or product sales. This is something that is rarely considered when suggested to my clients, but rethinking and evolving business relationships from one of simply supplier to that of partner or investor can be transformative, often in times of threat. Entering into such arrangements should be done with a clear understanding of risk and reward, and as much objective legal and financial expertise as is required to assure mutually beneficial outcomes to both parties.
Again, it is important to understand that debt is a healthy (and necessary) part of the sustained operations and growth of any viable enterprise when managed appropriately. Where debt reduction can provide additional vigor to your company’s longer-term viability, one or more of the strategies outlined above should be applied to foster that outcome.
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