Let’s make one thing clear from the start: debt in business is not a bad thing. In fact, most businesses owe money in one way or another. In a recent survey, only 21% of U.S. SMBs reported having zero outstanding debt. However, if you’re struggling to pay lenders and creditors back, that’s when business debt becomes a problem.
Debt can quickly get out of control, especially if the business hits some financial snags. For example, research by Deloitte Insights shows a drastic rise in corporate debt accumulation in 2020, followed by a sharp decline in repayment abilities, all due to the business disruptions caused by the COVID-19 pandemic. Also, bad borrowing habits and poor financial planning can lead to unmanageable debt.
In this article, we’ll tell you how to avoid and get out of crippling business debt by formulating a sustainable debt repayment plan and sticking to debt repayment best practices.
The importance of a debt repayment strategy
A debt repayment strategy is a series of steps to reduce or clear outstanding debts. It could be as simple as directing a fixed portion of revenue toward debt repayment or as involving as debt restructuring or consolidation. The strategy will obviously vary depending on the business and debt situation. But ultimately, carefully planning debt repayment helps your business clear or better manage its debts and regain a firm handle on its finances. Here are more reasons why a get-out-of-debt plan is so important:
- Cleans up the balance sheet
- Preserves and even improves the business credit
- Prevents debt-related legal action such as asset repossession
- Maintains good terms with lenders in case you ever need to borrow again
- Waives unnecessary financing costs (additional interest, fines, and penalties)
- Gives you peace of mind
How to settle severe business debt
Are you having a hard time paying down your business debts? Follow these seven tips to relieve your debt load and restore a solid financial footing:
1. Pick a repayment strategy that works
The first thing you want to do is pick and stick to one repayment plan. It takes a lot of commitment and discipline to pay off debt. A repayment strategy helps you maintain that discipline by setting discrete goals and tracing a clear path toward those goals. Here are some common debt repayment strategies that could work for your business:
- Debt snowball – Start by paying off the smallest debt and work your way up to the biggest. But remember to keep paying the minimums on all the other debts. Snowballing is an effective way to ramp up debt repayment and see encouraging wins along the way.
- Debt avalanche or debt stacking – Pay off the debt with the highest interest rate or risk first, then the one with the second highest rate, and so on. Again, keep paying the minimums on the other debts. This approach focuses on minimizing repayment costs and risks.
- Debt refinancing – Repay multiple debts with a single large debt. Doing this might seem counterintuitive, but it works brilliantly in some situations. A new debt buys you more repayment time and might be easier to manage and cheaper to repay than several small debts.
2. Negotiate with lenders and creditors
Approach your lenders or creditors and try renegotiating the financing terms to make repayment easier. It’s always worth a shot. Most lenders are willing to hear out struggling borrowers if it helps recoup their money. Renegotiations usually revolve around these three options:
- Debt restructuring
The lender can modify the debt terms to encourage repayment. For instance, they may agree to lower the installments, extend the repayment period, waive fees, or reduce the interest rate.
- Debt consolidation
This has the same result as debt refinancing. But instead of paying off one debt with another, consolidation combines multiple debts into one debt. The repayment terms on the new debt are more favorable, so it's easier to settle.
- Debt relief plan
You can try a debt relief plan if your business is completely overwhelmed by debt. In this case, a debt relief company negotiates repayment with creditors on your behalf. The settlement is usually made in a lumpsum payment lower than the owed amount or a borrower-friendly debt management plan. This mostly works with unsecured loans and credit card debt. But keep in mind that settling debts this way can damage your personal and business credit scores, and it’s not always guaranteed to work.
Some lenders conveniently support debt relief and management plans in-house. The SBA, for example, has an ongoing debt relief program for eligible borrowers impacted by the COVID-19 pandemic.
3. Cut your spending
You really have to commit if you want to get out of debt. Sometimes this means making a few financial sacrifices, such as cutting non-essential expenses. Any money you save by trimming your business spending can go toward clearing debts.
Take a critical look at your expenditure list and cross out all the items you don’t really need. Start with any redundant, luxurious, or unnecessary expenses. Then, ditch costly suppliers and service providers for less expensive or more financially flexible alternatives.
4. Get your customers to pay sooner
One of the reasons many businesses drown in debt is failing to reach the revenue projections they were banking on to service loans. For some, the problem is not that they don't sell; the purchases are not paid for fast enough. This is actually a big issue for many firms. According to the latest statistics, only 29.1% of business invoices are paid on time in the U.S.
Find ways to encourage your customer to pay promptly. For starters, you could incentivize punctuality by offering rewards to early payers and penalizing late payers. Remember, you can always factor your invoices and other account receivables instead of risking more debt or falling behind on repayments.
5. Boost your income
Some extra earnings can go a long way in repaying debts. Here are some ideas on how you can boost your income to speed up debt repayment:
- Find the least costly way to diversify your offerings or expand your customer base.
- Raise your profit margins (cautiously).
- Arrange seasonal offers, discounts, and clearance sales.
- Liquidate any valuable assets your business doesn’t need.
- Apply for eligible rebates, tax returns, grants, etc.
- Rent out unused office spaces or machinery and vehicles.
6. Automate debt payments
It can be difficult to keep track of repayments, especially when handling multiple debts from different lenders. You can easily miss critical due dates simply by forgetting to approve or release funds. Try automating your debt payment to avoid such mistakes. Instead of making each transfer manually, you can set up automatic bank withdrawals or employ a third-party payment management service to handle all your debt repayments.
Doing so ensures you never miss a payment deadline and narrows the margin for error in debt repayment transactions. It also streamlines bookkeeping and budgeting.
7. Finance your business wisely
Taking the wrong financing approach can put your business in costly and risky debt. In many cases, unfavorable financing products are to blame for severe business debt. Some loans, lines of credit, cash advances, and credit cards are not structured in the borrower’s best interest. Plus, each financing product is best suited to a particular business model or financial situation. So, making the wrong choice can easily do more harm than good.
Lendzero can help you avoid this problem. With Lendzero, you can check and analyze all the borrowing and financing options available to your business to ensure you make the right decision. On top of that, every offer comes pre-negotiated for favorable repayment terms. Sign up with Lendzero today and take the first step in wise business financing.
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