If you’re a small business owner, getting into debt can be incredibly overwhelming. Whether you find yourself with credit card debt, loan debt, or tax debt, business debt can feel crushing. However, there are many ways you can get a handle on your small business debt.
In this post, we’ll take a look at how you can get rid of debt for your small business, including examining your budget to stop the debt cycle, strategically paying off debt to avoid harsher interest or penalties, negotiating with creditors, and taking advantage of financial strategies that can help you pay off your debt more easily. Though Tax Defense Partners is usually primarily focused on resolving tax debts, this post includes tips for getting rid of all kinds of small business debt.
Closely Examine Your Expenses and Expendable Assets
Whether you think you know what got your business into debt or are unsure, once you’re in debt, you need to closely examine your business’s finances. Take some time to examine your expenses and see if there’s anywhere you may be overspending or spending unnecessarily. For example, consider whether or not you need to have an office space to run your business, whether or not you need to have a costly telephone system, or whether or not the advertising you’ve been using is actually worth the ROI.
Additionally, if you’ve bought any equipment or materials for your business that have gone unused, consider selling these items and putting this money toward paying off your business debt.
Examine Your Budget to Stop the Debt Cycle
If your business’s debt isn’t the result of an unexpected event but is instead the result of normal business operations, you probably need to revisit your budget. Your revenue should always cover fixed costs, such as rent for your operating space, business utilities, and fixed staff salaries. But you should also always have enough revenue allocated in your budget to cover variable costs, like raw materials, billable staff wages, and shipping costs. In your budget, you should allocate more than you think you’ll need for variable costs, which can help cover you if you happen to have unexpectedly high costs during any given period. If you end up having money left over in your budget from lower variable costs, use that extra money to pay down debt more quickly.
Decide What Debt to Pay Off First
Do you have a debt payment strategy? Often, when a business is in debt, they’re in more than one kind of debt. If you have more than one kind of debt, you may not know which to pay off first or which you should focus on paying off more aggressively. So what kinds of debt should you focus on first?
If you’re struggling with business tax debt, it’s very important to prioritize this debt, as you do not want to have to deal with IRS collection actions. Whether you can pay your tax debt off in full or need to enter into a payment agreement with the IRS, prioritize making a plan to pay off tax debt as soon as possible (and never ignore IRS communications).
Those who don’t have tax debt will likely want to start tackling their business debt by focusing on the debt with the highest interest rates, which is often credit card debt. Additionally, those who have any debt that they could be personally liable for (meaning a creditor could come after you as an individual for your business debt— while this includes tax debt, it is not limited to it) will want to consider making that debt a priority.
Talk to Your Creditors
If you haven’t spoken to any of your creditors, you may think that the terms of your debt are set in stone. However, if you speak to your creditors and inform them of your business’ hardships, they may be willing to offer you a hardship plan with more favorable payment terms. Sometimes, you will be able to get reduced settlement amounts or set up a payment plan, especially if you (politely) inform your creditor that you’d be able to pay off debt faster with better terms.
However, remember to never agree to new terms without being completely certain you can hold up your end of the bargain. Defaulting on a repayment plan could end up putting your business in an even worse situation.
Consider Debt Consolidation or Debt Refinancing
If you’re struggling with high interest on your debts, you can consider debt consolidation or debt refinancing. Debt consolidation is a financial strategy in which you combine multiple loans or cash advances into a single loan, which would ideally have a lower interest rate and/or a shorter repayment period. Debt refinancing involves taking out a lower interest loan, using it to pay off high interest loans, then paying the lower interest loan to save on interest costs. Both of these options can be an excellent way to reduce your monthly costs and streamline multiple payments into a single payment.