12 Ways to Cope with Debt and Keep Your Business Alive

How to Handle Debt as a Small Business

June 18, 2020

Times are tough for small businesses right now. On top of the stressors you always face, you now have to work on picking up the pieces after a pandemic, during a recession. Even as the country begins to reopen, capacity is limited and patrons are wary. It could be a while before you hit stride.

In the meantime, you’ll need capital to keep operations running. But it’s easy to take on the wrong sorts of debt and defer your thinking to ‘when things get better.’ Instead, let’s get in front of this. How can you support your business and make sure that debt doesn’t spiral out of control? What can you do if you’re in need of assets that customers owe you? Calkins Law Firm is here to help.

A Word on Debt

There are all sorts of debt that you can take on as a business owner, and in the current financial climate that list can be especially long. But we’re going to make this sweeping generalization and say that debt that is taken on with a specific goal, business move, or expansion in mind is rational. Debt that’s incurred to merely keep the doors open and employees paid––that’s just not sustainable.

In the current financial environment, most everyone is hurting. So creditors could be extra diligent in collecting what’s owed them. But remember: how your business is set up will determine how much creditors can demand. Recent stimulus and federal programs may have helped your situation. But there’s also a decent likelihood that they didn’t. So now is the time to take a realistic look at your situation and plan for the future. Here is our general advice to help you determine which sorts of debt should be chipped away at first, and what to do if you find yourself in a worst-case situation.

Debt Best Practices

Business types can determine whether you’re personally on the hook for debt, or if it’s strictly a company matter. But whether your business is a sole proprietorship, a limited liability company, a partnership, or a corporation, there’s always a chance that you’ve personally backed or guaranteed a loan or other business debt. These are the sorts of debt you’ll want to take a hard look at, because they’re going to affect your personal finances, not just the business books.

If you are staring heavy debt in the face, here are

12 Ways to Cope with Debt and Keep Your Business Alive

Be Honest

Get in touch with creditors, customers, and vendors and let them know that you’re in financial distress. This one move could buy you time, or at least make all parties aware as a first step to a sustainable payoff plan. Customers who owe you money might be more likely to pay up. And creditors may settle for less each month, so long as they’re guaranteed that you’ll be repaying over time.

Protect Assets

Now is the time, before taking drastic measures to handle debt, to be sure that your business insurance is up-to-date. Depending on how you go about handling this financial crisis, your insurance company could refuse to renew down the road. Making sure that you’re protected for the duration can eliminate one stressor.

Cut Costs

Find the parts of the business that aren’t holding their own and create a plan to reduce costs. If office space isn’t being used or expensive technology systems aren’t necessary anymore consider eliminating them, even if just temporarily. Reduce offerings and streamline services to best suit your business’s bottom line. Sometimes this means reducing staff, but that should be a last resort.

Increase Revenue

This could sound counterintuitive in the current business scene, but a minor increase in service costs to clients could add that little bit of cash you need right now. Selling at a discount to loyal customers is another possibility. Bundling services could allow for an upsell, and reinventing parts of your business to fit into the current market is another option. And an obvious answer is to sell or scrap unused equipment. Diversification and increased marketing efforts could help to bring in new customers.

Collect Debts

If you’re in debt and customers owe you cash, this is a starting point. You don’t want to harass anyone or open yourself to legal action, but being persistent and consistent in your requests might get you the capital you deserve and desperately need. Consider reducing customers’ debt, even slightly, to encourage payment. And make sure that communications are documented. If your efforts fall flat you could consider a collections agency or litigation, but these both bring their own complications and costs.

Analyze Your Budget

Create a budget based on your business’s current financial situation. Include monthly and fixed costs, and allow some flexibility for variable expenses. This will give you a true picture of where you are, and where you need to be.

Prioritize Payments

Work on paying down high-interest debt or loans that are personally guaranteed. Payroll taxes are also high-priority and won’t be ‘forgiven.’ Utilities and communications bills and court judgments are other payments that could spell serious trouble if they go unpaid.

Consolidate Loans

Consolidating debt will at least allow you to manage it amid this turbulent financial situation. You’ll still be paying creditors and not harming your business’s reputation or your credit.

Consider Selling

Even in a challenging market, some people are still looking to buy businesses. If they have the assets and skills, they could breathe life back into a failing business. If you’re going to consider selling, make sure you’re still doing all you can to improve the business before handing it over. Minor cosmetic updates, paying down debt, and developing a business plan going forward can show potential buyers that the business still has value and that it can be reinvigorated.

Selling a business can be extremely complicated, but this is our area of expertise. Learn more about selling your business on our website and contact us today with any questions, we're happy to help.

Investigate Bankruptcy

This is a serious step, and the type of business will determine the type of filing. But if there’s no other way to go, bankruptcy is always an option. The process can be complex and drawn out, and we’d recommend seeking the expertise of a bankruptcy lawyer. This could just be a temporary solution that helps you to get your feet back under the business, or it could be permanent.

Learn more about bankruptcy best practices and tips on our website.

Liquidate Assets

Creditors will likely get more through liquidation than through bankruptcy, so this might be a negotiating tool.

Shut Down 

No one wants to quit a business they’ve put their heart into, but sometimes it’s better than sinking with the ship. Shutting down in an orderly way can satisfy creditors and wipe clean your financial slate, giving you the opportunity to reinvent your business dreams.

Before you get overwhelmed by the possibilities and what the future holds, get some concrete truths straight. Determine if your business’s debt is manageable with some simple steps, or if it’s far beyond what you can handle. If you can, put growth on hold and just focus on meeting deadlines and holding to agreements. Either way, slow and steady will win this race, so put your head down and move ahead.

Calkins Law Firm Can Help

Emerging from this pandemic during an economic downturn can dial up stress to a point that many business owners have never known. At Calkins Law Firm we understand what you’re dealing with, and we are ready to help. If you are at the point of considering debt consolidation or beginning the bankruptcy process, we can work with you to restructure existing debt and negotiate with your creditors. We have vast experience in business law and we will use our expertise to benefit you. So if you’re in need of some solid legal advice, please feel free to reach out.

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