Risk is part of running a business. You can’t easily plan for recession, natural disasters, or other negative events, because if you take a too-cautious approach then you’ll never succeed. But sometimes the odds will go against you.
With prices for everything from materials to healthcare on the rise, many business owners are straining under the weight of growing debt. Certainly, bankruptcy is one route business owners can take to salvage their companies, but such a move comes at a steep price. Then there’s also the long-term damage that bankruptcy causes to both the business and the owner’s personal credit scores.
If you find yourself unexpectedly further in debt than you’d like, don’t panic. There are options available but they require action. If you sit back passively and wait for the worst to happen, it just might. So take action. Manage what you owe before it becomes unmanageable. To avoid debt you cannot recover from, here are some ways businesses can dig out of debt.
Understand your situation
If you fail to make payments on your debts, the consequences are often disastrous. They can include loss of employees, seizure of stock, and costly court cases brought by your creditors.
Potentially worse than that is the risk of government intervention. If you fail to pay the taxes you owe, the government will come after their money. So stay sharp and aware of your situation. Keep a close eye on your outstanding debt and monthly payments. This information should be at your fingertips at all times.
Tackle your highest interest rate debt first. However, your priorities will depend on the type of business you run and how flexible your suppliers are willing to be. The following payment priorities are suggestions, but the actual order is for you to decide:
- Payroll: If you don’t pay your employees’ wages on time, you may be penalised for this. You may be able to renegotiate contracts with some staff, but that’s likely to affect their morale
- Suppliers and business partners: Avoid losing valuable goodwill with your most loyal suppliers and business partners
- Aged payables: If you don’t pay, your credit score will be impacted, which will affect your ability to borrow money in the future
- Bills: Outgoing costs such as rent and utility bills need to be paid. And again, not paying these could affect your credit rating
- Secured debts: If you run your business as a sole proprietor or partnership, you might be held personally liable for debts, and creditors could try to take your assets if you default. If you’ve personally guaranteed any of your business debt, make sure paying off those debts become a high priority as well
- Insurance and credit cards: Avoid penalties or interest charges as these can pile up quickly
Cut unnecessary costs and free up cash
Identify the parts of the business that got the company into debt in the first place and attack them head on. 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.
Revisit the 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 your current financial situation.
- Make sure your business revenues can more than cover your fixed monthly costs
- Allocate a portion of the budget for variable costs such as manufacturing materials
- What is left over should go towards your debts. Otherwise, your debt will keep building and it’ll take years to pay off
- Consider implementing an accounting software into your business in order to help you track your budget
Speak with creditors
Tell your creditors the financial situation you’re in and the hardship the business is going through. Then, ask if they have a hardship plan that may provide better payment terms. If the creditor doesn’t offer one, request a payment plan or a reduced settlement amount. Just make sure you can fulfill your end of the bargain. The worst thing a business owner can do is set up a repayment plan with a creditor and default.
If creditors are unwilling to work with you, consider enlisting the help of a credit counseling organisation. While these nonprofit organisations typically offer debt-management help only to consumers, some will work with business owners. Another alternative is to contact a professional debt-management company. These companies can help sniff out inefficiencies and negotiate better payment terms with creditors.
List your bad payers
A lot of the time, companies fall prey to debt because they let their unpaid payments from their customers stack up. Doing nothing about your bad payers can have a disastrous effect on your bottom line. In order to take back control of the situation, you can list your non-payers and send final demand letters. This will allow you to not only take action against your non-payers but will also yield you results.
Take the first step
Ignoring your debt will not make it go away nor will it reduce the effect it has on your business. The business world has a lot of uncontrollable factors, but implementing these steps can ultimately help you reduce the effects of your debt. Take the first step by contacting us at MarisIT and let’s get your non-payers listed today.