Hundreds of small businesses are set up in the U.S every year and roughly a quarter of them fail in their first year of trading. That depressing statistic does not, however, stop entrepreneurial people from pursuing their dreams of going into business.
Rather than being afraid of failure, business owners should take adequate steps to ensure their businesses are protected from unmanageable debt. According to the U.S Small Business Administration (SBA), most small companies fold due to financial problems. The most common of these include lack of money to run the business, poor credit management and personal use of business funds. Businesses that find themselves short on money will find it hard to cover basic expenses such as rent or payroll and can ultimately become bankrupt.
In order to ensure the financial health of their businesses, entrepreneurs should know how to pay down any business debt they might incur. Some of the various options available are discussed below:
- Rewriting the business’s budget
Before dealing with any business debt, small company owners should first assess their current financial situations. A good way to do this is to formulate and work with a business budget or financial plan. The budget should clearly identify any income sources for the business as well as fixed and variable expenses. The business owner should adjust or rewrite the budget anytime the business experiences unexpected changes in the cash flow. The budgeting process can be automated by using accounting software to track cash inflow and outflow. This will help entrepreneurs better manage their business costs and expenses.
- Reduce business expenses
When it comes to avoiding or tackling debt, small business owners should make a point of reducing their business’s expenses. This involves taking an overall look at the company’s operational costs and deciding which cuts can be implemented. This may include measures such as subletting idle office space, reducing the number of employees or moving to a smaller office space. Alternatively, the business owner can try to renegotiate with vendors or suppliers to see where they can benefit from a few discounts.
- Boosting revenue
Another way to work off debt is through boosting the business’s revenue to increase cash inflow. There are various methods that small business owners can use to increase their revenue and these mainly depend on the type of business. For instance, owners can decide to put some of their items on sale or give discounts and special loyalty bonuses to loyal and repeat customers. While doing this, it is also important to follow up on any outstanding debts from clients.
- Prioritizing debt
Small business owners should learn how to prioritize their debt payments. This enables them to identify which debts should be cleared first as well as which creditors or suppliers should be paid first. Financial experts agree that small debts should be cleared before larger ones. This, they say, frees up the company’s capital allowing the owner to devote more funds and energy in dealing with larger debts.
- Working with debt-restructuring professionals
Sometimes, the business owner might need more help to climb out of business debt. In such instances, it would be better to enlist the services of a debt-restructuring professional. Debt-restructuring services are aimed at giving a business the chance to restructure in order to restore or recover its liquidity. There are specialist lawyers who can advise company owners on things such as debt settlement, bankruptcy, and out-of-court restructuring. The lawyer can negotiate with creditors or collection agencies on the business owner’s behalf in order to change, renew or extend any existing credit agreements.
Starting and running a successful business involves a lot of challenges, many of which are centered on business finance. Every small business owner needs to educate themselves on managing finances and avoiding debt.
