Financial Management: 7 Steps To Getting Your Small Business Debt-Free

The Federal Reserve found that 70% of small businesses have unpaid debt, with 21% registering $25,000 to $100,000 in debt, according to Fundera. Interestingly, debt can significantly boost business growth. However, if not well managed, debts can ruin your venture. Whether you are new in business or an established entrepreneur, you need to be diligent with your finances. If you are struggling with settling your dues, it is essential to find effective strategies to get your business out of debt. By doing so, you can focus on improving productivity and sales.

Use Personal Loans to Consolidate Debts

Entrepreneurs often opt for personal loans when banks reject loan applications. There are several reasons a bank will reject financing applications, but the most common is a low credit score. If your business credit score is low, applying for a bad credit loan can help you secure the financing you need. A bad credit loan or personal loan offers numerous benefits to any small business owner. Since you can use these loans for any purpose, you can consolidate unpaid debt, finance your business expansion, and purchase equipment.

Because of their flexible terms, personal loans will help you pay off old loans. That way, you will have only one loan to settle. The interest rates might be high if you choose to take an unsecured loan, but they can be worthwhile, depending on your business structure. You may also apply for a secured personal loan to cut down the interest rates. However, this will depend on whether you have enough equity or collateral to meet the lender’s requirements.

Know Your Financial Situation

When you know how much money you owe, negotiating payment terms with creditors becomes seamless. You can start by writing an inventory of the outstanding debts you have. Your list should provide exact details, including the total amount, credit fees, monthly payments, and due dates. Review your credit report to ensure your list is up to date and determine which unpaid debt you want to prioritize. Experts recommend paying off high-interest debts first. Once you have an account of unpaid dues, keep the list somewhere you can easily refer to as soon as you make the first payment. You want to be sure that your total amount is shifting as you settle each monthly bill.

Revise Your Budget

A business budget plays a significant role in identifying income streams, variable costs, and fixed expenses. Creating a financial business plan helps you set aside monthly payments for rent, small business loans, and supplies. So, anytime you sense that your business is getting into debts, consider reviewing your budget first. Adjust your budget for unforeseen changes in cash flow. This move will help you set realistic goals, improve how you handle finances, and develop a debt management plan for your business.

Eliminate Non-essential Costs

Unnecessary spending could be the reason your business is falling into debt. Chances are you are investing in services and products that don’t offer an effective ROI. Non-profitable items can range from furniture to vehicles, software, and office space. Therefore, evaluate your spending habits and find effective ways to cut costs within your business.

Consider reducing staffing costs by hiring contractors or freelancers to limit insurance and full-time office costs. It is also wise to negotiate with suppliers. Instead of agreeing to the first price they offer, consider asking for a discount. Moving to a smaller office, buying fuel-efficient vehicles, and purchasing supplies in bulk can also help cut expenses.

Boost Sales and Revenue

Increasing sales and income in your business is a sure way of reducing the impact of pending unpaid debt you may have. When the number of units your brand sells increases, this translates to increased cash flow. With a sufficient supply of income, you can minimize outstanding balances monthly. However, to achieve the best results, you need to develop a strategic marketing plan. Start by conducting market research to find out what customers expect from your company.

Once you’ve gained a clear understanding of your consumers’ expectations, consider running advertisements and promotions in specific locations. Limiting your marketing campaigns to a specific region helps you test and monitor your product without overspending. Apart from advertising, review your pricing model, expand distribution channels, and improve customer service on both on and offline platforms.

Pay Debts on Time 

Most entrepreneurs fall into debt because they tend to delay loan repayment. If you are among this group, it is essential to revise your business loan payment plan. Rather than waiting for bills to build up, make it a routine to pay every month. Also, settle outstanding loans before applying for additional funds to expand your business.

By paying loans on time, you eliminate the possibilities of your company accumulating long-term unpaid debt. Timely repayments also maximize profits because outstanding balances won’t require a large percentage of the revenues your business makes. Additionally, repaying loans before due dates will help you build positive long-term relationships with creditors and other investors who play a vital role in financing your venture.

Reduce Payment Terms with Customers

If you have clients paying credit on a long-term basis or consistently pay late, it would be best to reevaluate your payment terms. For instance, instead of giving clients a 90-day clearance cycle, reduce it to every 30 days. That way, you can maintain regular cash flow every month. Also, develop a reliable collection strategy that will guide you on how to handle unpaid invoices.  Although you can manage unpaid debt by yourself, you may require the help of a debt-reconstruction company at some point.

These professionals will negotiate with creditors and banks to extend or renew existing lines of credit. They will also set automatic withdrawals in your accounts to ensure you pay the bills on time. A debt-reconstruction company will charge a fee, however, it is cheaper when compared to the hassle of filing for bankruptcy.

Consider loans as investments that should earn profits instead of high-interest rates. That way, you can avoid unpaid debt from accumulating more than your business can handle.