5 ways to reduce small business debt

The U.S. Small Business Administration (SBA) cites poor credit management, lack of money and personal use of business funds as some of the top reasons why small companies fail. Businesses that lack money to cover basic expenses such as rent and payroll can quickly spiral into delinquency or, worse, bankruptcy.

Moreover, the Bankruptcy Abuse and Prevention and Consumer Protection Act of 2005 has made it harder for small businesses to prove they should be cleared of all or some of their debts through Chapter 7 bankruptcy.

To ensure the overall financial health of your business , it’s imperative to know the various options available for methodically and effectively paying down business debt. From eliminating excess costs, to restructuring debts through a third party, being proactive and formulating a payback plan enables you to manage your bills before they become unmanageable.

1. Rework your business budget

Before attacking business debt, get a good handle of your current financial situation. If you’re falling behind on monthly payments, revisit your financial plan and adjust for unexpected changes in cash flow.

A business budget helps identify your income sources, fixed costs and variable expenses. Budgeting also gets you into the habit of setting aside a monthly amount to pay your landlord, suppliers and creditors.

Seek professional advice from your accountant or contact non-profit associations like the SCORE Association for free business counseling, mentoring and online workshops on business budgeting. You can also automate the budgeting process using accounting software like QuickBooks to track money flowing in and out of your business. Ultimately, revisiting and revising your budget will help you better manage costs and form an action plan for reaching your debt-reduction goals.

2. Reduce business expenses

Next, take a look at your operating costs. Figure out which expenses you can axe versus services that are necessary for the daily operation of your business.

For example, do you pay for subscriptions that you use infrequently? Are there professional memberships you can suspend temporarily until you get your financial house back in order? Consult your accountant or use accounting software to forecast the financial impact of cutting costs in different areas of your business.

If you’re leasing an office, consider subletting unused space or downgrading to a smaller work area to reduce your monthly rent. You may also be able to negotiate reduced prices and flat rates with certain vendors. For example, software providers often provide discounts for bills paid annually versus month-to-month.

Your financial statements  can be particularly helpful in pinpointing expenses contributing to your debt. Cutting costs may be the fastest way to increase cash flow and chip away at your liability before resorting to more drastic debt-reduction measures.

3. Increase customer sales

In addition to slashing costs, look at ways to increase customer sales that will boost your revenue. Offer mark-downs on merchandise and discounts on services, especially for loyal and repeat clients.

Additionally, ramp up accounts receivables by following-up on late payments from customers. For instance, presenting your clients with discounts for paying fees upfront can help improve your cash flow.

4. Communicate with creditors and lenders

If you find yourself falling behind on payments, prioritize debt payments to determine which creditors and suppliers must be paid first. Your cash flow statement should be particularly helpful for identifying delinquent accounts and missed payments.

Once you’ve figured out the amount of money you can allocate towards outstanding debts, contact creditors to see if they’re open to arranging agreeable payment terms. Ask your lenders about available loan-consolidation programs, which can group multiple loans into a single monthly payment.

Furthermore, find out if you qualify for a hardship plan that includes a lower interest rate and payment extension. Creditors typically require a hardship letter that explains your current financial situation and provides proof that you require assistance to meet your debt obligations. For example, creditors and lenders may request to see:

• Current and previous tax returns
• Bank account statements
• Income statement, balance sheet or any other financial statements

For guidance on how to write a hardship letter, see Docstoc’s customizable financial hardship letter template.

5. Work with a debt-restructuring firm

Enlisting the help of a professional debt-restructuring firm is yet another option if previous efforts to climb out of business debt have failed. Debt-restructuring professionals negotiate with creditors and collection agencies on your behalf to formally extend, renew or change existing credit agreements. The debt-restructuring process generally involves a written contract between you and the debt-restructuring company, as well as the setup of automatic withdrawals from your bank account to settle outstanding debts.

Although a debt-mediation firm typically costs a monthly fee, it’s usually a less-expensive alternative to filing for bankruptcy. Moreover, some of the benefits of debt structuring include:

• Extended and reduced monthly payments
• Reduced (or the elimination of) legal bills
• Less time spent dealing and negotiating with creditors and collection agencies
• Gradual improvement of credit with consistent, on-time payments

If you decide to hire a professional debt-restructuring company, choose a firm that is prepared to work within the payment and time parameters set by creditors. Also, being honest with the debt-restructuring firm on what you can afford to pay each month will help them arrive at a settlement that works for both you and your creditors.