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As a small business owner, you have a lot to manage—future business goals, vendors, new marketing strategies, and maybe even some employees. And that’s far from an extensive list. Add debt to the mix, and you suddenly have one more thing to juggle. Debt is sometimes necessary to get a small business off the ground or to keep it running. But it can create unnecessary pressure and headache. Over time it can stand in the way of your business objectives and become an unsustainable expense. To get it under control, here are five tips to help you manage your business debt.
Categorize and Organize the Debts
First, you should map out each debt that you owe. This can be done in a simple spreadsheet or even with pen and paper. The important thing is to be specific. You want to list every individual debt and include detailed information about it, including the following:
total remaining balance monthly payment amount interest rate due date creditor method of payment (check, automatic draft, etc.) purpose of the debt type of credit (loan, personal credit card, business credit card, etc.)
With this information gathered in one place, it will be easy for you to see exactly what you owe and when, and it will help you make a game plan moving forward. This exercise will remind you of the expenses that led to the debt, which may provide the opportunity to reconsider whether those expenses are essential moving forward. It will also influence your plan of attack, because different types of debt can be handled differently.
Identify the Issue
You will want to carefully consider the source of your business’ debt problem. Look with a critical eye to see whether you are on pace to take on more debt or whether the current debt is the result of past expenses that are unlikely to arise again. Knowing the cause of the debt will help determine how to go about solving it.
Reduce Spending and Increase Income
While there are unique considerations for business debts, in some ways you should manage them like a basic personal debt. The two major parts of the equation are your spending and your income. Minimizing your spending will free up extra funds to put toward debt and should help you avoid new debt. Increasing your revenue will also provide more funds for debt and is often a good indicator that your business is growing.
In the business context, changes to your expenses and income may involve the following strategies:
Cut out the fluff. Doughnuts for the office, special lunches, extra office space, networking conferences—these expenses can all add value to your business, but none of them are mission critical. If you are in a pinch consider cutting nearly all nonessential expenses with the hopes that you can reintroduce them when you are back on track. Renegotiate prices or contracts with third-party vendors. Be careful not to jeopardize good business relationships, but think about where you may be overpaying and may not have shopped around in a while. Change your prices. Depending on your business model and customer base, you may be able to earn more by either increasing your prices or decreasing them to improve sales volume. Follow the demand. Where is the low-hanging fruit for you to make some cash? One idea is that your customer base may have demand for more of what you offer. Maybe it’s a new related product or service, or maybe your customers would like you to extend business hours. Do some quick research and number crunching to calculate the costs and benefits of these changes. Improve your invoicing. If you are often lagging behind on sending invoices to your clients, work to send them more frequently. This will minimize cash flow issues, which can sometimes lead to debt. Depending on your agreement with clients, you might also consider shortening the due date on your invoices. The accounting software company Xero says that 30-day invoices are becoming “obsolete.” So, consider shortening your payment window to 14 days, especially if you use electronic invoices and payments.
Talk to Creditors
If you see the writing on the wall that you are going to fall behind on your debt obligations, or even if you are already behind, then reach out to your creditors. Proactive communication can go a long way to keep your situation manageable. Creditors are often willing to work with borrowers who are in a bind, especially when those borrowers communicate early.
Creditors may be willing to lower your interest rates, make temporary modifications to your repayment requirements, or even help you consolidate your debts into a new debt with better terms. Just make sure you understand how consolidation works.
Consider Professional Options
If you have tried the above strategies and are not making progress, you may consider working with a professional to help get your debt under control. There are firms that specialize in business debt strategies as an alternative to bankruptcy. You just have to be careful.
Watch out for high fees and any promises that sound too good to be true. You should also avoid debt settlement. Make sure any arrangement you agree to is clear, and get the terms in writing. If you do not understand how it works or if it sounds too good to be true then take a step back and find an advisor you trust who can review the plan with you.
Also, remember that many business debts require a personal guarantee, which means your own credit is at risk. And, if you have some debts that are actually personal debts you used to invest money into the business you may have a different plan of attack for those. Consider a debt management plan for your personal debts, which can provide a stable and structured repayment plan while you focus your other efforts on your business.
You have a lot on your plate as a business owner. Getting debt under control will make managing your business at least a little easier. Put these tips into action so you can have some peace of mind and start achieving more of your business goals.
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Not having any cash on you or forgetting to pack a lunch can seem like an emergency when you’re hungry at lunchtime. Having a credit card can save the day by paying for a small, manageable expense.
A credit card can also come to the rescue in real emergencies, such as paying for a hospital stay, air conditioner repair during the summer, major car repair, or a plane ticket home to visit a sick relative, among other things. But depending on a credit card to pay for unexpected expenses can be a bad idea for a number of reasons.
Is it really an emergency?
A shoe sale isn’t an emergency. Neither is a beer run on a Saturday night. You know what an emergency is.
But sometimes that can be difficult to see during whatever the situation is. Or it’s subjective and an emergency to one person isn’t one to another. Buying a plane ticket to visit a sick friend may be an emergency to you, while another person may call them or send a card.
If it’s something that affects your basic, immediate needs, then it’s probably an emergency. Food, shelter, your health or getting home while traveling can be emergencies worth charging to a credit card. But even those should get you thinking about alternatives and the implications of using a credit card.
Pay it off within 3 months
If you expect to have the extra income to pay off an emergency charge within three months, then it’s probably OK to use a credit card. One month is best so you can avoid interest charges, but three months is reasonable — provided you can afford the interest.
This is one reason why it’s important to think about how you’ll pay for an emergency long before it happens. If you can’t come up with a way to pay it off within three months, then you could get into financial trouble.
It’s a loan with interest
Not having the money in your bank account to pay for an emergency room visit definitely sounds like an emergency. But remember, using a credit card means you’re taking out a loan that you’ll have to repay — with interest if you can’t pay it all back at once.
If the credit card you’re using is one that you regularly pay off entirely each month, then paying interest for a few months may not be a problem. But if you’re paying interest on other transactions each month, adding more may not fit in your budget.
It could lead to more debt
The interest on the emergency you charge could be just the start of debt you can’t afford. If you can’t afford to repay it soon, it could lead to more credit card charges.
Try to avoid this by resolving not to charge more purchases to your credit card until you’ve paid off the emergency debt.
Also, emergencies obviously don’t happen when you expect them to. Two or three can pile up at one time, not giving you enough time to pay them all off and leaving you with a huge amount of debt.
You’re at a creditor’s mercy
Many credit card companies are happy to give you a higher credit limit when you need it for an emergency.
But if you’re at your credit limit, do you really want to rely on a last-minute call to a creditor to raise your credit limit during an emergency? They may decide not to extend you enough credit for your emergency, especially if you’re already maxed out or have a history of late payments.
If you’ve had a few emergencies happen together, you can easily max out your credit card and not have many options.
Harder to save
Beyond saving for retirement, your kids’ education and any other long-term goals, piling more debt onto a credit card for an emergency can prevent you from putting money into an emergency fund.
This fund can be the best way to cover such costs. It’s cash you’ll have available to use whenever it’s needed. Ideally, it should cover a year’s worth of living expenses in case you lose your job, but starting with one to two months of expenses is a great start.
Emergencies are going to happen to you sooner or later. Planning for them now, when you don’t have one in front of you, can make funding an emergency fund easier.
Start by automatically transferring $50 or so per week to the fund, and set a small goal of $1,000 to get you motivated.
Pick the right card
It can help to have one credit card dedicated to being used mostly in emergencies. You’ll want to use it once a month to keep it active — such as for a recurring bill such as cable TV — and then leave it untouched until an emergency pops up.
Find a credit card with the lowest interest rate possible, without an annual fee or a low fee, low late fees or over-limit fee, and a good grace period.
Get a card with a high enough credit limit to cover the emergencies you’ll need to cover. Homeowners who commute, for example, will need higher limits than a renter who walks to work.
Once you get a credit card dedicated to emergencies only, keep it deep in your wallet or purse and don’t use it for anything else. If it’s too much of a temptation when shopping, leave it at home or with a trusted relative. Just be sure to carry it with you when you travel, or that you can be billed for the emergency and pay it later.
And when using it for an emergency, you may want to call your creditor to alert them to the big charge coming. If you only use the card for small purchases from time to time to keep it active, they may suspect fraud when a large charge is made, and may flat it as stolen or freeze it. You don’t want a real emergency to lead to another one with your credit card provider.