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Dealing with Debt as a Small Business


Dealing with debt is not just common in business, it is often the best way to go about things to manage your cash flow properly. For many small business owners who are more used to the idea of personal debt, this can seem alien.


But dealing with the right amount of debt at the right time can turn business woes into success. However, as many small businesses are sole proprietorships and hence have unlimited liability, dealing with debt needs to be done in an informed and very careful way. If you are a small business and have acquired debt, here’s what you need to know.


Continue Your Business

If you want to continue the business, but there are creditors asking for their money, you have several options. Your primary strategy should be to conduct a full financial analysis, as you will need to inject money into the company and this will need to come from your own pocket or from investors.


In both instances, you need to have a plan. If you own a sole proprietorship and you do not have a plan on how to deal with debt, interest rates can build up and the debt may become extremely hard to resolve, leading to banks taking the decision to foreclose your home to get their money back.


As the stakes are quite high, you need a solid plan that involves:


  • Cutting costs – audit your business completely and make it as efficient as it possibly can be. If you haven’t done inventory management, do that now. You should have enough stock to meet your demand, but any overstock at all is a waste. Depending on your margins, it may make more sense to just about sell out than to have any overstock.
  • Contact all your customers and clients to help resolve your debt – if you run a business that takes payments from clients, work out how many clients you would need to pay you instantly to cover your debt. Increase that number by 10 or 15 percent and then offer those clients a discount of 10 or 15 percent. In some instances, this can pay off debt without you needing to go out of pocket.
  • Start a communication with your lenders. Don’t ignore them, explain your situation and be open about your cash flows. Ask if they have any advice for you and they may point you in the right direction, lower your interest rates or help to give you a different repayment plan. It is in their interest if you play ball, as collecting debt can be expensive.


Halting Business

If your debt has gotten too much, you do have some options if you allow your business to fail in a controlled way. You can sell the business to pay off (or even transfer) your debt and ease the stress off yourself. You could also systematically liquidate your assets, selling off every asset the business has bought. Do this with your creditors and try to work out a solution — even if you can’t meet the full amount, some creditors would accept less money if they know that forcing you into bankruptcy would be more expensive. You could also declare bankruptcy, but if you’re a sole proprietorship, this means you have to declare personal bankruptcy to rid yourself of this debt.


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