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Home / Finance / Budgeting and Personal Finance / How Small Businesses Can Address Debt
How Small Businesses Can Address Debt

How Small Businesses Can Address Debt

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Feb 21, 2019 By Jake Anderson

Businesses of all sizes and types power the global economy. Many of them are small, independent and built by people with little more than a vision and hard work.

However, per data from the Bureau of Labor Statistics (BLS), half of all small businesses don’t make it beyond five years, and organizations that make it a decade are among an exclusive “33 percent club.”

How does a business get to the coveted 10-year mark? How can it continually grow and expand operations without impacting its day-to-day operations?

No matter the size and stage of a company, the recipe for scaling stays similar: take on debt and balance it effectively. Of course, that last part is often easier said than done.

Let’s discuss a few ways small businesses can address debt to ensure they’re around for the long haul.

Negotiate Loan Terms

Interest rates change all the time, and there’s a good chance better terms exist than what your loans carry. Instead of accepting subpar loan terms as a matter of poor timing or lack of foresight, simply picking up the phone could change the circumstances. Why? Because whether you’re a business or an individual debtor, creditors want to be paid—so it’s always in their best interest to work with loan holders.

You’ll have the best chance at securing new terms if you reach out before any re-payment issues and are communicative about how a restructuring would help your business (and your repayment ability) long-term.

Organize, Consolidate Debts

Whether you’re managing your business’s books, or you have a dedicated bookkeeper, you’ll save the business some headaches by maintaining as few debts as possible. If you’re bogged down paying several loans with varying interest rates and due dates, consolidating those debts with a balance transfer card that offers a zero-percent introductory period will simplify your monthly repayment process and possibly save you money in interest.

Another strategy is to take out a new, larger loan with a lower interest rate and use it to pay back your various balances. This is generally referred to as debt consolidation, and while a business can take matters into their own hands, they can also enlist the help of companies like Andrew Housser’s FreedomPlus. The specific strategies taken will ultimately depend on your business’s revenues, your credit score and how long you’ve been in business.

Declutter Organizational Processes

A key difference between large companies and small businesses is the amount of employee bandwidth that’s available. As a result, SMBs can be less organized and run inefficient operations.

To understand how your company moves and is connected, document your operational processes in a flowchart. Get more granular as needed, but home in on the various areas of your operation by talking to every employee about their role. In doing so, you’ll likely find at least a task, software tool or process that’s in need of tidying.

Evaluate the Cost-Effectiveness of Supply Chain Relationships

Just as you want to comb through the internal processes that help your business function, it’s equally imperative to assess the cost-effectiveness of each third-party with whom you engage in business. Are suppliers, distributors, and agencies pulling their weight? If not, it might be time to negotiate a new contract or start looking for other partners.

Small businesses can’t afford to mismanage something as essential and routine as their supply chains. When they do, they often become another statistic. Ensure every firm you do business with is driving value and saving your company money.

Pay Attention to Your Debt-to-Income Ratio

Though myriad factors contribute to the financial health of your business, no measure provides a quicker summation of health than a debt-to-income ratio (DTI). Totaling your monthly recurring debt payments and dividing it by your monthly gross income will give you the ratio. If you’re looking for a specific number to stay below, you won’t find it here.

Every business is different and as such, no DTI is universally recommended. However, as a very general guideline, debt-to-income ratios below 1 indicate that a business has a stable amount of debt, while DTIs over 1 suggest a business is more reliant on their debt.

The economy changes and businesses evolve, so it’s important to regularly pay attention to your DTI so your loans don’t reach a boiling point that can’t be reversed. Remember, just 33 percent of SMBs make it a decade. Not every business that failed did so because they didn’t have business; as helpful as debt is, too much of it can quickly capsize even the most promising of SMBs.

The best way to address debt at the end of the day is to know exactly how it’s serving both your business’s day-to-day operations and long-term growth. Going through the steps above will go a long way to aligning these crucial business areas.

Filed Under: Budgeting and Personal Finance Tagged With: Debt, Financial Management

Jake Anderson

Jake Anderson

Awestruck by Star Trek as a kid, Jake Anderson has been relentless in his pursuit for covering the big technological innovations which will shape the future. A self-proclaimed gadget freak, he loves getting his hands on every piece of gadget he can afford.

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