Rising interest rates and high levels of corporate debt have lots of investors concerned. Should small businesses be worried?

The majority of small businesses (in most industries) are able to pay their bills on time. According to Experian/Moody’s Analytics Main Street Report, overall delinquencies for businesses with fewer than 100 employees were slightly down in the third quarter of 2018. Credit utilization rates were also down slightly.

At the same time, that same research has found that rates for delinquencies of 31 to 90 days rose slightly. While it’s not yet a cause for concern, the report points out that “the period of consistent declines in delinquency rates for small businesses may be near its end.”

It’s impossible to predict the future. There are smart moves you can take, however. If your business is carrying debt, now may be a good time to consider trying to pay it down, pay it off, or perhaps restructure it. Here are six steps your business can take to get out of debt this year.

How to Get Your Business Out of Debt in 2020

1. Review your budget

If you don’t have a budget, now’s the time to create one. Reviewing your last few month’s worth of bank and credit card statements should give you enough information to create a basic budget, though ideally a year’s worth of data will be most helpful. You want to be aware of all sources of revenue and expenses, and you want to identify trends, such as expenses that have crept up or revenues that are in decline.

If your business has multiple clients or sources of revenue, categorizing income and expenses by type can help you understand which parts of your business are the most profitable.

Feel overwhelmed by the numbers? Try a budgeting app, some of which offer free versions. For more one-on-one help, your accounting professional may be able to help you review your financial situation. And free or low-cost business counseling or mentoring is available through a variety of organizations. (See Step #6)

2. Reduce expenses

As you review your budget, you may be surprised how many expenses are on autopilot. If you haven’t reviewed them in a while, consider categorizing expenses in one of three ways:

1. Continue. The expense is essential and you must continue to pay for it. Payroll taxes would fall into this category.
2. Negotiate. The product or service is essential but you might be able to find a way to lower the cost by negotiating with the supplier or by shopping around. Employee benefits, insurance or even some contractors could fall into this category.
3. Eliminate. Get rid of the expenditure altogether as soon as possible. A variety of expenses can fall into this category. Some cuts here will be hard— letting go of an employee, for example— but may be necessary to keep your business afloat.

Don’t forget about expenses that occur infrequently, such as annual memberships or technology subscriptions. These may automatically renew if you don’t proactively cancel them in advance.

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3. Increase revenue

Sales are the standby for increasing small business revenue. (And here that means selling more, not necessarily selling your products or services at a discount.) And there are myriad ways to do that, from selling more to your current customers to finding new markets for your products or services. (Here are four ways to increase your small business revenue.)  

If you’ve been reviewing your budget, you also know that some sources of revenue are more profitable than others. Focusing your efforts on increasing high-profit revenue can give you the biggest return on investment.

Collecting money your customers owe your business can also be a way to boost your bottom line in the short term. Some businesses find that offering a discount for prompt payment is better that trying to chase payments for weeks or months.

4. Consolidate debt

Debt consolidation doesn’t erase debt, but it can make it easier to pay it back, provided the new debt is less expensive than the old. If you can consolidate with a lower-rate line of credit, term loan, or even a business credit card balance transfer, for example, you may be able to lower your monthly payments.

Or you can continue to pay the same amount each month but pay your debt off faster. If you’ve found other ways to cut expenses or increase revenues, you may even be able to make larger payments to retire your debt faster. (Generally, the lower your interest rate, the more your payment goes to paying back the debt, rather than interest.) And even if you can’t lower your monthly payment, locking variable-rate debt into a similar loan with a fixed interest rate may help protect your business from interest rate hikes in the future.

But don’t rush to get a new high cost loan to pay off a loan you can’t keep up with. You may pile interest on top of interest, and dig the hole that much deeper. If your only option for avoiding default is another high cost loan, move on to the next steps.  

Keep in mind that comparing costs on business loans can be confusing because there’s no federal law that requires them to provide an APR. Use Nav’s free calculators to help you understand the cost of any loan you’re considering.

5. Negotiate terms

Do you have long-term suppliers or vendors? See if you can negotiate better terms with them to reduce costs or improve cash flow. Some might extend payment terms of anywhere from net-30 to net-90 days, giving your business more time to pay for their product or services. Others may be able to give you a discount if you pay quickly, saving you anywhere from 2 – 10%.

In other cases, you may need to negotiate a longer time to pay off debt you owe. Communicate with your creditors, suppliers, or anyone else you’re having trouble paying as soon as you can, If you fall behind and don’t let your creditors know you’re trying to catch up they may send your account to collections or sue your business. In a few cases, a default could give them the right to seize business assets, including funds in your business bank accounts.

If you do modify your payments get the agreement in writing. Also double check whether you’ve provided a personal guarantee on the account. If you have, it may be reported to your personal credit reports and/or the creditor could try to collect from you personally. Most small business credit cards, for example, require the applicant sign a personal guarantee, but some small business credit cards don’t report to personal credit unless the business falls significantly behind on payments.

Finally, keep in mind that slow payments or problems such as collection accounts or tax liens can show up on your business credit reports. Monitor your business credit so you’re alerted to any negative information as soon as possible. (You can get business credit reports and scores for free from Nav.)

6. Get help

If your debt is overwhelming and you’re worried about falling behind on payments, it can be helpful to get advice from a neutral third party. Research has found that people under financial stress may be more prone to make less-than-optimal decisions.

Some potential sources of help:

• A business mentor from your local Small Business Development Center (SBDC), SCORE, Women’s Business Center, or Veteran’s Business Outreach Center. The SBA provides a helpful online locator tool here.
• Some companies specialize in helping businesses restructure debt. If you decide to work with one, check them out thoroughly and carefully review the contract before you hire them to help ensure you aren’t throwing good money after bad.
• A bankruptcy attorney may be able to help your business restructure debt.

Finally, keep in mind that business debt isn’t always bad. If you can secured affordable financing and have a solid plan for paying it back, you can come out ahead.

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