Small Business Tips: How to Minimize Business Debt Burden?

The majority of small businesses rely on credit financing to meet operational expenses. A survey found that nearly 70 percent of businesses rely on debts.

Small businesses that have outstanding debts face financial problems. It is costly to service debts. Here we will share some tips to minimize business debts.

1. Accelerate Customer Collection

Most small businesses take on debt to meet cash shortfall. Negative cash flow problems mostly occur if customers delay making payments.

Improving customer collection is important to address cash flow issues. You must encourage customers to make payments early by offering discounts. Also, you can implement a penalty for late payment.

You should also consider doing business only with customers who make quick payments. You must do everything to collect the amount due from customers early. This will boost the cash flow position due to which you won’t likely have to rely on external financing.

2. Evaluate Existing Debt

Assess the line of credits that you have availed. You must look at business loans, credit cards, vendor credit, and other types of external financing.

Once you have assessed the debt, you should consider how you will prioritize payments. You must weigh different options depending on your specific situation. A good rule of thumb is to pay back debts as quickly as possible.

You must renominate terms with the lenders to reduce the debt burden. Negotiating with lenders will help you lower the debt.  Find out about refinancing options to get better deals.

4. Consolidate Loans

Most businesses tend to ignore the renegotiation of debt. They tend to schedule automatic debt payments without communicating with the financing companies. Remember that lenders have the same interest in your business’s financial position. They want your company to remain financially solvent to repay the loan amount. They want to retain customers rather than aggressively pursue repayment of the loan.

Lenders will welcome any initiative taken by your business that will improve the prospect of repayment of the debt amount in full. They may even reduce the fees and other payment terms so that you are better able to repay the loan.

You must negotiate with the lenders for a favorable outcome in debt servicing. Depending on your financial circumstances, the lender may agree to avoid increasing the fees. The lender may also forego penalties for late debt payments if it will make it easy to continue paying the debt.

Loan consolidation is also a good option to reduce the debt burden. Some financial firms pay back your existing loans and give you a single loan. The consolidated loans generally have more flexible payment terms and lower servicing requirements.

5. Hardship Loans

If you are having difficulty paying debts, you should consider hardship loans. Applying for such loans requires that the debtor explains the financial position. You need to provide proof to the lender that you cannot pay existing debts in the present financial situation.

Creditors require proof of financial assistance. You may have to provide bank statements, tax returns, and financial statements.

6. Focus on Business Growth

A lot of businesses delay investing in activities that improve their profitability so that they can pay off debt early. This may seem like the right strategy. However, it will have an overall negative impact on your business.

You must always seek to grow your business profit. Avoid prioritizing debt payments over the growth of your business. You will have an easier time paying off the debt when your business profitability grows.

Paying off your debt early will help you reduce the financial burden. But it should not be at the expense of improving profit. You should balance debt servicing and growth investment to ensure sustainable operations.

7. Consider SBA Loan Options

Small Business Administration (SBA) loans are a recommended option for small businesses to reduce the debt burden. One type of recommended loan is the 7(a) program which has flexible qualification criteria.

The criteria for the SBA loans are less stringent compared to traditional loans. The fees and terms of these types of loans make it easy for small businesses to repay the loan. The application process may be a bit complicated but the benefits in terms of reduced debt servicing make the effort worth it.

Some financial institutions also offer a business line of credit through the SBA. Loans are also an attractive option for small businesses to reduce the debt burden. These loans have lower fees and longer payment terms as compared to traditional loans.

8. Look for Federal and State Grants

Small businesses should consider government grants to ease the debt burden. Federal and state grants are offered to small businesses to offset the high cost of debt servicing. The grants are provided to businesses that are facing financial difficulties.

Government offers grants to businesses during emergencies such as the Covid-pandemic. Various grants are available for different business segments. These grants are available from regional and federal agencies as well as non-governmental organizations. The grants are sometimes narrowed to a specific business segment. You must read the eligibility requirements to know if your business is eligible for grants.

9. Improve Operational Efficiency

Improving operational efficiencies can also help in reducing the debt burden. You can take measures such as outsourcing bookkeeping and other non-core tasks. In addition, you can take internal cost-cutting measures to make more cash available for meeting financial obligations.

Modifying customer credit policies can also help improve operational efficiency. You can enforce lower payment terms such as net 30 instead of net 90 to encourage customers to quickly make payments.

Look for opportunities for long-term business relations with vendors and outsourced service providers. They will be willing to offer you discounts if you continue to do business with them over a long period.

Maxim Liberty provides experienced outsourced bookkeeping services to small businesses. Contact us today if you want help in bookkeeping as per generally accepted accounting principles. Our professional accountants can handle bookkeeping tasks for all types of businesses.