How to Manage Debt

5 Ways to Pay Down Small Business Debt

Whether you’re dealing with late-paying clients or a drop-off in company sales, various issues can cause small business owners to feel the burden of debt. In fact, a 2012 poll revealed that 36% of small business owners are uncomfortable with the level of debt they presently carry. Fortunately, where there’s a debt, there’s a strategy for dealing with it.

Here are five ways to pay down small business debt without destroying your credit or giving up the company you worked so hard to build.

1. Snowball Method

The snowball method is a popular debt reduction strategy that involves paying off smaller balances first before moving on to accounts with larger ones. When you’ve paid off the card with the smallest balance, tackle the one with the next lowest amount due while adding the previous debts’ minimum payment on to the new one. By the time you are ready to pay off the larger accounts, you theoretically have more money available to do so.

It’s important to note that snowballing is best used for revolving credit debts like credit cards. Also, don’t forget to pay the minimum amounts required on all other debts if you choose this method.

2. Consolidation

Just like consumer debt consolidation, small business owners combine multiple business loans with different interest rates into a single loan with a lower rate. Typically, a debt consolidation company will negotiate the new loan rate and collect payments, which are used to pay former creditors. In this way, business owners are taking out one new loan to replace the previous ones. Not only does consolidating debt let you pay less interest overall, but it also saves you time, since you’re paying just one bill a month.

Despite the obvious benefits, debt consolidation isn’t right for all small business owners. If you use secured debt consolidation, you may need to put your own assets up as collateral. On the other hand, people with poor credit may struggle to qualify for unsecured consolidation. Do your research to determine the best method of debt consolidation for your specific needs.

3. Cost Cutting

If you want to reduce your small business debt, it’s a good idea to take steps to limit your spending across any and all parts of your business. Along with selling off unneeded assets or equipment, SMBs can reduce costs by limiting the size of their workforces and increasing sales through such things as new marketing endeavors.

Additionally, small businesses may be able to negotiate lower costs by speaking to suppliers. In some cases, suppliers will give discounts to customers who switch to them from a competitor or pay for goods ahead of schedule.

4. Stack Method

Sometimes considered the opposite of snowballing, the stack method involves paying down debts with the highest interest rates before those with lower ones. While continuing to make the minimum payments on all accounts, owners invest any extra funds in the debt with the highest interest rate. Once you pay off the first account, move on to the one with the next highest rate.

Although debt stacking can be frustrating due to the length of some higher-interest loans, businesses that use this method are paying less money than those who wait to pay down high-interest debts over the longer term.

5. Chapter 13 Bankruptcy

While traditional bankruptcy is often seen as a last resort, filing for Chapter 13 bankruptcy enables business owners to pay off debt without losing control of their property. Chapter 13 bankruptcy allows businesses to develop a repayment schedule to creditors. Generally, small business owners pay a portion of their future income for a period of three to five years until the debt is satisfied.

While Chapter 13 can be more appealing than other forms of bankruptcy, there are some drawbacks. Under this option, small business owners endure enhanced scrutiny on the part of the bankruptcy trustee. Additionally, businesses may struggle to operate and pay their employees if all their money is going into debt repayment.

Not every small business owner is a candidate for Chapter 13 bankruptcy. Generally, filers must not have debts in excess of $1,149,525. Additionally, individuals must be current on their tax filings, and have enough disposable income to make payments.

It’s important to remember that individual proprietors can’t file for Chapter 13 on behalf of their business entity (e.g. limited liability company, S Corporation, C corporation, etc.). They must file as an individual or opt for Chapter 11 bankruptcy instead.

Dealing with small business debt is always stressful. However, there are ways of minimizing the burden that don’t require owners to declare bankruptcy and destroy their credit. Do your research to determine the best method of debt reduction for your business.

If you want to learn more about small business debt, read our next article to see if your small business is carrying too much debt.

Chapter 4.
How to Pay Off Small Business Debt With the Snowball Method5 min