Business Miscellaneous

Avoid Bankruptcy: 6 Steps to Get Your Business Out of Debt

Small businesses sometimes need to get a loan in order to sustain their daily operations until such time that they have a more stable cash flow. On average, loans granted to businesses in the United States amounted to $663,000 in 2017.

There are many reasons why companies secure a loan. In some cases, they get financing to expand their operations, purchase new equipment, increase supplies and inventory, facilitate mass production, and increase working capital. Despite the risk, there’s no denying that taking out a loan helps drive a business to success.

However, without proper monitoring and careful analysis, debts can easily pile up, leading to staggering interest, charges and penalties. Debts can become too much to handle and can lead to serious problems, or worse, bankruptcy. According to this report, 45,315 companies go bankrupt in the U.S. per year.

In order to avoid business failure, every entrepreneur should learn how to effectively manage their debts. This can be achieved through the following steps: 

1. Focus on boosting sales.

Increasing sales is one of the best ways to raise enough funds to support a company’s daily operations and pay for existing debts. There are many ways to increase customer sales. One is developing a targeted business marketing plan.

It is important for a business to understand who they are already selling to and find ways to expand their customer base, possibly targeting a new market. Additionally, there are traditional techniques and new tools that can be used to boost sales, such as social media marketing, discounts, promotional events, and online advertising. Some businesses offer attractive offers such as “bundle products”. Others do well with upselling. For new businesses, offering free samples is a great way to entice customers. Depending on their target audience, there are a whole lot of ways to promote products and services which lead to increased sales.

2. Revisit the budget.

Regularly reviewing business budget is an important practice that every business should observe. It helps companies understand their current financial situation, analyze reasons for any shortfall, see potential problems, ensure that there’s enough money to pay for debts and other financial obligations, and so on.

A business budget also helps a business identify their income sources, along with their fixed costs and variable expenses. In some cases, the budget can be reworked or adjusted in order to effectively manage debts and create an action plan to minimize unnecessary expenses and boost income.

3. Cut or delay expenses.

Being able to reduce operational costs without sacrificing service or product quality is a challenge for many businesses. But once addressed, it is a great way to improve profitability and pay debts. Of course, the case is different from one company to another. But there are proven ways to cut expenses, such as:

  • Reduce staffing cost especially during slow periods.
  • Streamline workflows and processes to improve productivity.
  • Negotiate with suppliers for lower prices of raw materials.
  • Cut transportation costs.
  • Maximize equipment use. Avoid buying new ones unless necessary.
  • Find cheaper ways to advertise products.
  • Lower office or commercial space needs.

4. Consider debt consolidation.

Managing even a single loan can be overwhelming sometimes. Multiple loans even more so. Debt consolidation means taking out another loan to pay a number of existing loans. It is often used to manage unsecured debts, and brings about a couple of benefits, such as lower monthly payments and lower interest rates. In some cases, it also enables businesses to borrow additional working capital.

However, business loan consolidation is not for everyone. To avail of this program, one has to have a good credit score, a history of making timely debt payments, and the loans to be consolidated should generally be short term loans, such as a cash advance online or an equipment loan.

5. Raise extra revenues.

Finding additional opportunities to generate income corresponds to better sales. A traditional restaurant, for example, can raise extra revenues by putting up a catering business or expanding their client base to include schools or offices where they can supply meals on a regular basis. Companies can also raise extra income by putting up a different business concept.

A very good example is IKEA. While they are known for selling furniture, IKEA stores also offer food products to their customers, serving breakfast, lunch and dinner options. Raising prices is also a good strategy. This allows a business to collect more revenue from every purchase a customer makes.

6. Get professional advice.

Credit counseling, which is mostly offered by non-profit organizations, helps businesses learn ways to manage their debts and enhance their cash flow. Typically, a credit counselor will create a debt management plan under which they will negotiate with the business’ creditors to lower the amount owed or the monthly repayments, or extending the periods by which the company can pay off their loan. The Financial Counseling Association of America as well as the National Foundation for Credit Counseling provide a list of certified credit counselors in the country.

Taking on a business debt can be a good thing. But there’s a dark side to it too. Once debts become unmanageable, it can ultimately destroy a business. Fortunately, there are ways to get out of debt no matter how difficult the situation is. With these steps, every business can address their financing problems and avoid bankruptcy by effectively managing their loans.

About the author

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Lidia Staron

Lidia Staron contributes articles about the role of finance in the strategic-planning and decision-making process. You can find really professional insights in her writings.