Thursday, March 31, 2011

How to Understand, Manage and Reduce Your Business Debt

By: Javi Calderon on Wednesday, November 10, 2010

The general public has a very black-and-white understanding of the word ‘debt’. After all, we were raised our whole lives to know that debt is bad. On a personal level, yes, you do not want to owe people money. It is very stressful and constricts your ability to live freely financially. However, from a business standpoint the ability to take on debt gives you the flexibility to spend money that you may not have in order to grow your business. As the old cliché goes, you have to spend money to make money.

Take the United States, for example. Our government is currently over 13 trillion dollars in debt! Yet the World Bank isn’t coming to Americans’ doorsteps and kicking them out of their homes, and we’re still living relatively prosperously. The key is having an income that can support the debt while also being able to put some away in savings. Business debt is a careful and precarious balancing act; the trick is to understand your business’ limits. Taking on too much debt can have absolutely catastrophic affects on your business.

To see where your business stands calculate your business’ debt-to-equity ratio. Take the total amount of debt you owe and divide it by the equity you own in your business. The lower the ratio the better, low ratios mean that your business can comfortably handle the amount of debt. Ideal ratios can vary greatly by market and industry, so research ideal debt to equity ratios for your industry before moving forward with any plans.

As you may expect, not all businesses experience debt as an asset. Many get trapped under a mountain of bills that strangle their ability to succeed, or even worse, force them to close their doors. When you have more debt than you can afford to pay, its time to start taking steps to reduce your debt before it suffocates your business.

5 Tips to Lowering Business Debt

1.   Creditors are not Your Enemy! When creditors come calling people often times try to hide from them in order to avoid confrontation. If you think about it, creditors are really more of an ally than an enemy. Their ideal is for you to be in sound financial standing so that you can pay them. They get nothing if you go out of business, so they are very willing to negotiate if it means receiving some payment from you instead of none at all. Reach out to your creditors and ask if you can negotiate a longer-term payment plan that will be more suitable for you. As long as you are paying them, they will be happy.

2.   Tighten Your Belt. Unfortunately, in times of financial trouble the most effective way to cut costs is to cut personnel. Look for areas that you can reduce spending or improve efficiency without affecting your products or services.

3.   Reorganize Your Assets.
Is there a building or piece of machinery that your business owns that you no longer use? Do you own investments or other properties? Sell, sell, sell to reduce your debt.

4.   Loans, Debt Consolidation, Debt Restructuring:
In dire circumstances it might be prudent to take out a business loan in order to pay off your debts. This way you can stop paying late fees and fines, be back in the green and have a little breathing room.

Business debt consolidation is the process of consolidating all your outstanding debts into one and then negotiating with your creditors to reach a reasonable payment plan.

Hiring a debt consolidation service to act on your behalf and negotiate a debt restructuring might be an effective use of your funds. The important thing is to get out of debt before it takes your business.

5.   Worst Case Scenario:
If you have exhausted your options and you still don’t see a way out from under your debt then you should file for Chapter 11 reorganization bankruptcy. Research all options exhaustedly before coming to this conclusion; filing for bankruptcy will have disastrous affects on your credit so try to avoid is at all costs.

Chapter 11 reorganization bankruptcy will freeze all your debts while you come up with a new plan of how to conduct business. You will have to find ways to reduce expenses and increase income in order to pay your creditors. Your creditors will then have to approve your new plan.
As you can see, business debt can either be the key to expansion and success, or it could consume your business and force you to shut down. Knowing how to manage debt and understanding your specific financial situation is the key to using debt properly.

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