Is Debt Dragging Your Small Business Down? Here's How to Increase Your Long-Term Financial Health
If your company struggles with debt, it is not alone — many small businesses have outstanding liabilities. Regardless of how much debt you have accumulated, if you believe it stops you from reaching your full potential, eliminate it to get into good financial standing. Below are a few tips to help you do just that.
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Determine If You Can Comfortably Repay Your Debt
According to MileIQ, the very first thing you should do when it comes to oppressive debt is not to start repaying it right away. Doing so could lead to financial disaster. Rather, calculate everything you owe and then assess your income. If your debt-to-income ratio exceeds 40%, you may have more debt than you can afford to repay without going financially insolvent. While you should not give up just yet, don't rule out debt consolidation or bankruptcy either.
Collect on Unpaid Debts
Identify unpaid projects and collect those debts. Ideally, you will have a streamlined accounts receivables system in place that can pinpoint who owes you, how much they owe you and when they must pay. Highlight past due accounts and make a note of those with impending due dates. Contact customers with outstanding balances first. If necessary, offer to put them on a payment plan, which helps you bring at least some money in. For customers with not-yet-overdue accounts, offer incentives for early payoffs.
It may be easier said than done to make more money, but the bottom line is that if you can increase your income and not your costs, you can make a substantial dent in your debt. You can also boost your revenue by increasing your transaction size, the number of customers you serve and the frequency customers purchase products or services. Try selling in new markets as well.
Another great way to reduce your debt is to stop spending so much. Though there are several unique considerations for business debts, the National Foundation for Credit Counseling says that you can manage them in much the same way you would your personal debt. Some tips for doing so include the following:
- Cut the fluff. Stop spending frivolous money on items and services that do not directly contribute to your business's bottom line. Such expenses include company lunches, networking conferences, and morning doughnuts.
- Pay attention to demand. If one of your products or services brings in little cash flow, nix it. If you can offer a high-dollar product, replace your low-earning products with a new, in-demand one.
- Renegotiate vendor contracts and prices. However, do so in such a way that does not damage customer relationships.
If you have not already done so, consider incorporating. By incorporating, you’ll be able to raise capital by selling shares of your company to investors. You can also raise funds through crowdfunding or angel investors. Check if any grants are available in your industry. When applying for a grant, provide as many details as possible. Be sure to include the type of business structure, financial information, and marketing and branding strategies in your grant application.