The right amount of debt can propel the business into a high growth trajectory but too much debt can pull it down as quickly. The magnitude of the problem is revealed by a U.S. Small Business Administration (SBA) study that shows that half of small businesses tend to collapse within the first 5 years due to poor financial management, including excessive debt.
1. Choosing Between A Rock & A Hard Place
Often, even astute entrepreneurs fail to appreciate just how easy it is for them to mis-judge their re-payment capacity. In many ways, it is quite similar to individuals exercising poor control over their credit card usage and landing up in a debt trap. Business owners with too much debt on their balance sheets can decide to either save their business with proactive action or allow them to go belly up in such way that reduces the financial consequences.
2. Tactics For Saving The Business
Given a choice, every entrepreneur would like to save his business; after all, it’s not only a vision but also his reputation that’s at stake. Invariably, the first tendency is to try and bail out the business with some personal money. The chance of this strategy succeeding depends on the extent of the funds and the duration of the requirement. It works best when both are small, and there’s a real chance of being able to get your business on track.
3. Consolidate Loans
If you have chalked up multiple loans carrying high rates of interest, consolidating them will allow you to lower the effective rate of interest, make payments easier to manage, and lessen the stress on your cash flow by reducing the monthly payment to one that you can afford. You can even charge the company debt help agency with the responsibility of collecting due payments from your customers and paying off the creditors.
4. Cost Cutting
Often without realising it, costs can mount up unnecessarily. Taking a hard look at operational costs can be beneficial as also selling off or renting out excess land, buildings or manufacturing capacity. Dismissing workers, even though highly unpopular, may be examined as a last resort.
5. Contacting Creditors, Suppliers & Customers
If you are having problems in paying your creditors on time, take the initiative of contacting them before they get alarmed and ask them to restructure the dues, lower the interest rate, extend the credit period or even allow you more supplies on credit so that you can bring your business to an even keel. Work with your regular customers to encourage them to buy more with better discounts but with cash payments so that your cash flow improves.
In case none of the discussed methods work out and convinced of its long-term potential you are desperate to save the business from an untimely death, you can file for a Chapter 11 bankruptcy. Though a complex and costly process requiring professional legal assistance, bankruptcy can allow you to pay only to the extent of the worth of your assets and not the full dues.