Last Updated: Jun 28, 2017
Running a totally debt-free business might not be possible, but reducing your debt is a wise move. Here are 13 things you can do to help lower the amount of debt your business carries.
Your business is no different than your home—too much debt can cripple you. Although it might be ideal to run a debt-free business, that’s virtually impossible. The best you can do is to manage and reduce it as much as possible.
Don’t just be familiar with your numbers—know them. Knowing them means that you know the cost of each of your raw materials, labor, rent or lease costs, and everything else. Do you know what each item costs down to the penny? Do you know the interest rate on each of your debts? If you don’t, you’re probably paying too much for something.
Sometimes you stock a poor-margin item that gets people into your store, but as a general rule, if it’s not getting you to the margins that others in the industry report, it may not be worth your time. Sales that result in ultra-low margins are costing you money. Identify unprofitable sales and eliminate them or look for a lower price from suppliers.
Speaking of margins, each industry has its own benchmark for what are considered strong margins. Do you know yours? Check with your industry trade group, but once you know it, make adjustments. You can raise your prices, lower your costs, or both. The goal should be to raise margins without raising your overhead expenses. What are others charging for the same item? Can you purchase more at a significantly lower cost without losing the savings to debt service?
Like your refrigerator at home, some items tend to linger. Don’t put off ordering more of your popular inventory but look for the product that isn’t selling and liquidate it.
Inventory is probably where most of your money is tied up. You’re probably paying interest on that stale inventory that everybody forgot about. Don’t let it sit in your store unnoticed. Even if you move it at cost or for a small loss, liquidating is better than keeping the money tied up. Sell it online—eBay or Craigslist, for example.
Business owners are still enjoying an economic climate of low interest rates. If you have older debt, it’s time to renegotiate the terms.
If you’re having trouble making payments, talk to the supplier about extending the terms. You aren’t going to save any money but lower payments may give you the financial room you need until the product sells.
Do you have relatively new fleet vehicles or other larger items? Sometimes it makes sense to sell the items and lease them back. Payments might be lower. To gauge the payoff that comes from this strategy, you will likely need help from a professional crunching the numbers.
You were an employee at some point. You know that the people on the front lines will see things that the managers may not. Your employees know where money is being wasted. Ask them. They may be skittish about telling you for fear of retaliation. Explain to them why you’re asking and maybe offer a bonus to anybody who helps the company save money.
Don’t become that business owner that every customer hates but do insist that customers meet their payment terms. You probably won’t go to battle if payment is a few days late but when a couple of weeks go by, it’s time to start calling the customer to ask for payment. If late paying customers are a big problem, you may want to add a late fee clause to agreements you have customers sign before you begin work for them. Check with your local professional advisors to find out if there are any laws that regulate what late fees you can charge. Good business relationships happen when both parties feel respected and valued.
Nobody likes to reduce staff, but if your business fails, the reduction in staff will be much larger. Sometimes you have to make tough decisions that negatively impact the few to protect the many. Are there employees you could do without? Could you consolidate positions by paying one person more rather than paying benefits for two employees?
Most credit counselors are consumer-based but some work with small businesses. If you’re having trouble negotiating better terms, a credit counselor might be able to help.
Debt Management companies come into your business and sniff out where you’re losing money unnecessarily. They may be expensive but worth it in the long-run.
If things are really bad, an investor can offer an injection of cash often in exchange for a piece of your company. In general, avoiding this option is best since it involves signing away a portion of your future profits but if times are really tough, it’s worth considering. However, finding investors is difficult. Don’t wait too long to start looking.
Change what you can control. You have far more control over your expenses than your profits. You can’t make customers come through your doors but you can reduce costs. Concentrate on cost reduction and put that money back into servicing your debt.
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