I started out my web designing agency with only myself as the staff and my room as the main office. When I started, I would take almost all kinds of clients, especially the low-paying ones because I know that that’s the fate of new players in this field. After a few months, the workload increased and the demands also heightened, and luckily, the payment also peaked with them.
Slowly but surely, my company grew. I had more clients, more projects, and little by little my agency also became bigger. Over the years, I started to employ other web designers, graphic designers, video editors and other staff. It took long, but my little agency slowly became a medium-scale business.
Then again, like any other business out there, the big problem was business debt. It was crippling me in my early years, especially when I looked to expand with additional web designers and other staff. I had to take loans to establish an office and to pay off my employees, mainly because of the project-based nature of web designing. It was really hard to deal with debt.
After a lot of stress about my business debt, and almost going bankrupt, I decided to finally face it head on and work through it. I read a lot of material, talked with a lot of people for counsel, even my creditors. Eventually, just like how I built my company, I slowly but surely dug out of debt. With this, I’m happy to share with you the seven steps that I think can help you or anyone get out of their business debt.
Cut Unnecessary Costs
The first thing you need to do is to cut unnecessary costs from your business; you’d be surprised how much you’re spending extra in your business. Identify the parts of the business that got the company into debt in the first place and attack them head on. For example, 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.
Also, it’s always best to revisit your company 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. 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, your debt would keep building up. Without you knowing it, it would now take more years for you to pay them off.
Improve Cash Flow
In reality, you’ve already started improving your cash flow by eliminating the unnecessary costs in your business. Now, it’s time to be proactive on increasing the amount of money that goes into your firm.
One thing you must do is plan out and execute on increasing the productivity in the company. Focusing on optimizing the efficiency in your business or finding new ways to generate revenue can be sound strategies for increasing cash flow. You can also look to improve employee skills through training or introducing new technology as they serve as great investments in improving productivity and increasing profits.
Similarly, proper management of accounts payable can significantly increase cash flow (by virtue of smoothening the amount of money that you release to pay off your debts) and accelerate your ability to pay down debt. Many suppliers would offer payment terms of 15, 30, 45 and even 60 days after the delivery of goods and services.
Conversely, you may be able to negotiate an early payment discount – early payment discounts can be anywhere from two to ten percent. You can also look for Individual Voluntary Management payment systems like that of Creditfix – IVA so you can pay off the debt over a longer period without being threatened with potential bankruptcy.
Lastly, you can apply Lean Manufacturing in your company. It is developed from the idea of reducing waste and optimizing inventory turnover. Almost all businesses have some form of stagnant inventory, even web designing firms. This stagnant or excess inventory can drain your cash reserves. As such, inventory should be closely monitored and be purchased “just-in-time” for anticipated demand. If possible, work with suppliers that offer consignment inventory or rights of return for unsold goods.
Prioritize Debt Payments
Tackle the business’s highest-interest rate debt first. More often than not, this means that you need to concentrate your energy on paying down credit cards. However, if you’ve personally guaranteed any of your business’s debt – if a creditor or supplier can come after your personal assets if you default – make sure paying off those debts becomes a high priority.
Speak With Your Creditors and Ask Them to Lower Rates
Sometimes, it could be possible to get your insurance rates lower. Also, creditors would often agree to adjust your payment period and amount if you just talk to them. It’s actually fine to speak with your creditors, and it is something most people in debt do not do.
The easiest way to get a lower credit card interest rate is to ask for it. If you have a good credit score, and you are a long-term customer who pays on time, a request for a lower interest rate may be all it takes. If you are able to reduce your interest rate by one or two percent, you could end up saving hundreds of dollars a year.
Future-proof Your Debt
Another thing that people in debt take for granted is future proofing their debts. Interest rates for credit card debt, mortgages, auto loans and lines of credits are expected to rise by 1.25 to 1.50 percent annually. If and when interest rates rise, businesses with high debt and variable loans are the ones that are most affected.
Surprisingly, with interest rates at record lows, it is worth considering locking in a fixed rate interest loan before they rise. A fixed rate interest loan is a lender’s promise to maintain a certain rate for a specified period. This ensures that you pay the lower rate even if there is a hike in the interest rate. The first step is to identify what types of loans you are carrying – fixed or variable.
Consolidate Your Loans
Consolidating your loans into one payment allows you to reduce monthly costs without harming your credit. The best-case scenario is consolidating several shorter-term loans into one long-term package.
Consolidating debt is one of the fastest ways to lower your interest rates and pay down your debt quickly. Instead of paying different loans with varying interest rates, you can consolidate them all into a single low-interest loan.
In the long journey with business debt, seeking counsel may prove to be an underrated support tool. More often than not, it is a pride issue. However, once you swallowed your pride and asked for help, the world opens up, and you can slowly understand how to pay your debt more systematically.
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 would work with small-business owners. Also, an attorney’s advice can be very helpful if you have the money to pay a lawyer.