Small Business Debt
Small Business Debt – Friend or Foe?
Most of us didn’t go into business for ourselves because we wanted more quality time with spreadsheets or simply love the smell of oversized checkbooks bound in faux blue leather. Our vision probably didn’t include devoting quite so much time to begging friends and family for loans or “investments.” We didn’t long for the day we could tell our grandkids about selling family possessions on the sly and how grandma finally ran off with that rock’n’roll drummer because she wanted a more long-term security.
For better or worse, finances are a hard reality of running your small business just like they are the rest of your life. Money may not be the only thing that matters, or even the most important thing in the mix. Money does, however, impact almost everything that is important to you and yours. How we manage it shapes our status, our comfort, our security, and our options going forward.
We might as well figure out how to make the most of it.
Running your own business, big or small, isn’t quite like anything else in this complicated world. The only people who can truly understand the experience are other small business owners. Like marriage or having kids, there are some things you simply can’t “get” unless you’ve been there.
Small business debt, on the other hand, has a number of things in common with personal debt. For example? It’s nearly impossible to grow and thrive and accomplish the things we decide are important to us without taking on strategic debt from time to time. Small business debt can be a powerful tool for growth and security.
Then again, it can sometimes seem more like a necessary headache you endure in order to keep going. In some cases, it’s the final straw in the collapse of all you hold dear. That’s the thing about debt – if you don’t control it and make it serve your needs, it usually ends up controlling you.
PUT TECHNOLOGY TO WORK FOR YOU
Imagine an easy-to-use small business financial tool which made it possible to conveniently categorize income, expenses, or both, as they happen. Imagine being able to pull up data on your inventory costs, payroll projections, seasonal fluctuations in one or more parts of your business, or any other combination of information you need to make effective decisions, as easily as you check social media or text your partner to ask them if they need anything from the store. Imagine the analysis of a full-time accountant and the convenience of a fitness tracker.
Profitability relies on many things – the quality of your product or service, the market in which you’re operating, economic conditions across the nation, and maybe even a little luck here and there. Some factors we can control, others we can’t. Most small business owners would agree, however, that keeping track of everything at the same time is often over half the battle. There’s so much information, so many factors, so many invoices, so many priorities… all of which may be entirely different this time next week.
Imagine the ability to harness and access that information in practical, real-time ways with a few swipes or clicks. The technology isn’t making the decisions – that’s your job. What the right app or online tool can do, however, is help you make much more informed and effective decisions without having to take even more time away from what you got into business to do.
Debtry Works for You
State or Local Business Debt Help
Your state and local governments and communities want small businesses to succeed. They recognize what we all recognize – that without small businesses growth, our economy at any level simply can’t survive. There’s no shame in researching business debt help options in your state or county.
You’re not looking for a handout; you’re looking for a ladder to pull yourself back up and stay in business. You’re not looking to shirk on your obligations; you’re trying to find a path forward so you can keep paying your employees, doing your part to keep the economy moving, and keep paying all those taxes.
Check with your local Better Business Bureau or other small business associations. Call your county government and ask questions. If nothing else, spend a few minutes on the internet.
+ Business Debt Basics #1: To Budget or Not To Budget?
Whether you handle your books internally or pay an accounting agency to manage payroll, taxes, and such, any small business should have a detailed budget. For individuals, this is largely a matter of sorting out your income and detailing expenses so you can make more informed spending, saving, and investment decisions.
Small business budgeting is about those things as well, but there are additional elements which can help drive your business forward. For example, knowing your total income is important, but accurately breaking that income into appropriate categories makes it even more useful. And the relationships aren’t always obvious. Maybe you offer sales and service on a particular line of products, for example. Your markup on sales is decent, but your service department has high overhead and limited profitability, so you cut it in hopes it will help your business grow. Instead, the lost traffic from the change results in fewer sales. Oops!
This points to another aspect of small business budgeting which may not be fun but is absolutely essential. Budgets are not made to be framed or filed away and forgotten. They are living, breathing parts of everything we do. You’ve no doubt encountered other entrepreneurs who insist they shun the math and the details and run their businesses by instinct, with faith and courage and pluck and dreams. That’s great, as long as their suppliers are willing to accept pluck and dreams in lieu of U.S. dollars. The rest of us need a budget, not instead of our goals but in order to make them more attainable.
Pay attention to where your money is coming from and where it’s going. Ask yourself questions about possible factors or relationships based on what you see in the numbers. Partner with other local small businesses to talk shop. Or, find a business professor at the local university who needs some “real life” scenarios for her students to analyze. The point is, budgets are tools – use them.
Speaking of which…
+ Business Debt Basics #2: Keeping Track and Cutting Costs
“You can’t always control what you’re going to sell or how much money you’re going to make, but you can usually control how much you spend in the first place.” (Anonymous)
Obviously, we want to increase our income whenever possible, but income is only half of the profit equation. The other half is expense – our “out-go.” Much like with our personal budgets, taking more effective control of our small business finances means distinguishing between expenses over which we have little or no control, costs over which we have some control, and spending that’s entirely discretionary.
What cost control looks like varies widely from business to business. If you’re a sole proprietor, your primary expense may be office space or vehicle wear and tear. If you run a larger operation, manpower might be a major budget item. In manufacturing, it could be the tools and equipment themselves. There are no general statements that apply to every small business about how to effectively control costs. There are, however, better ways for you to recognize those factors and make those decisions based on your specific circumstances.
+ Business Debt Basics #3: When You Start To Grow Concerned
Maybe you’ve begun to realize that despite your best efforts, your small business debt is growing while your ability to keep up with it is wearing down. Sometimes this is a simple question of numbers. It’s impossible to generalize about what constitutes a healthy amount of debt for your business since small businesses are so different from one another. What might bankrupt one is simply business as usual for another. So, we may know that average small business debt in the U.S. is somewhere just above $200,000, but that doesn’t give us much to go on in terms of your business.
A more useful number is your small business’s debt ratio. Your debt ratio is essentially your total debts divided by your available wealth, or – more accurately – your total liabilities divided by your total assets. A debt ratio of .25 in most cases suggests you’re in pretty good shape. When the figure gets to .50 or higher, most small business experts say that’s an indication of trouble.
When You Say “Trouble”…?
Trouble – like the kind that starts with ‘T’ which rhymes with ‘D’ and that stands for ‘debt’ right here in small business city. Commitment and determination and refusing to give in to the odds are wonderful qualities in a small busines owner. They are, however, only a few small stumbles away from outright foolishness and self-delusion. The distinction isn’t always as clear as we might like.
Your business has a credit score and a credit rating just like any individual does. The scales and factors are different, but the idea is the same and none of the factors are especially surprising. Your business is more than its credit score, but you can’t survive long with your score going the wrong direction. You may be plucking along, full of pluck and determination, and show up to work one morning to discover your first customer is a debt collector.
Small business debt collection is an unfortunate reality of the game, and even harder to avoid than the individual version. While I’m sure you’d never avoid answering the phone or parking your car in the driveway at home in order to avoid creditors, that sort of evasion is impossible when you’re running a small business. If the small business debt collector can’t reach you, neither can customers or suppliers or potential investors.
Your creditors don’t want things to get personal between you and their representatives, but neither can they afford to provide goods and services for free. Commercial debt recovery is a specialized form of small business debt collection that means they’re no longer willing to devote their valuable time to trying to recover payment and have handed you off to someone who has all the time in the world to pursue just that end. It’s not how you want your small business to be known, and it’s 100% avoidable if you simply refuse to let your small business bad debt take over.
+ Small Business Consolidation Loans
One of the more straightforward solutions is also one of the most commonly overlooked. Small business consolidation loans act much like personal debt consolidation. You total your outstanding small business debt, then seek a single loan at a reasonable interest rate which is sufficient to pay off your entire debt. That business bad debt is replaced by a new, single installment to the new lender. This lump sum business debt settlement means that instead of dozens of obligations with which to keep up, you can focus on one.
The benefits are more than monetary. Although the total amount of debt for which you’re responsible hasn’t substantially changed, your suppliers are happy and your contractors are answering your calls again. You have access to the manpower, inventory, and equipment you need because you’re not in arrears. Your business credit cards are clear, meaning you can purchase essential office supplies and take that potential client out to lunch again.
It’s essential that you avoid simply slipping back into debt with all the same suppliers and other sources of credit you pay off with small business consolidation loans. Consolidation is a tool to make debt elimination or reduction possible; it’s a form of small business debt relief in the sense that it provides an opportunity to regain control of your small business finances and debt (instead of them continuing to control you). Small business consolidation loans don’t magically make debt go away.
+ Small Business Debt Restructuring
Another option is small business debt restructuring. This is a process which allows you to negotiate down some of your overdue debts with your creditors, giving you more time and better terms and giving them a better chance of getting paid. (If you end up in bankruptcy, they often get little or nothing.)
In the most common forms of general business debt restructuring, the creditor negotiates lower interest or a longer loan period – or both – in exchange for your promise of complete payment over time. In these arrangements, creditors don’t actually lose anything beyond time and potential additional interest or fees.
In some cases, troubled business debt restructuring relies on similar negotiations but with the understanding that the creditor may sacrifice a percentage of what they’re owed in order to make it possible for the business to stay operational and pay at least part of their debt. The details may vary, but the goal is to find an option other than bankruptcy which provides a degree of small business debt relief without entirely sacrificing the creditor.
Both forms of small business debt restructuring rely on a good faith effort by both parties to compromise in hopes they’ll both come out without more loss than absolutely unavoidable. You have to trust yourself that you are able to make the best decision for your business at any point. Mistakes happen, but there are ways to deal with them.
Goalry and Business Debt Help
We’re not lenders, and we’re certainly not debt collectors, but we are a company of entrepreneurs with extensive and varies small business ownership experience. We have an ambitious vision founded on the idea that most of us are perfectly capable of taking better control of our personal and small business finances if provided with useful information, effective tools, and the right connections to financial sources. We’re still growing our Goalry family of unified finance and we’re proud of the ways it connects to bring all the different realms of personal and small business finance together to let people take that better control over their finances, and through that, their lives.
You have your own vision and ideas on how to get there. Taking on average small business debt may be a part of that vision, and that’s fine. If you’re beginning to worry that the debt is distracting or detracting from your vision, however, don’t wait until your business is in danger to take the right steps. We get it.
We can’t do it for you and you wouldn’t want us to. We do, however, have the knowledge, insight, tools, and connections to help you do it for yourself. Where would you like to start?
