How to Overcome Debt Problems

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A pile of overdue bills.
A pile of overdue bills. (Image: Pixsooz/iStock/Getty Images)

A few bad decisions or an economic dip can be all it takes to start accumulating large amounts of debt. Once this happens, you have two choices: attempt to save your business and overcome debt problems or allow your business to fail. Choosing the first option means that you’ll need to implement a number of short-term debt reduction tactics, prioritize debt and then revise long-term financial plans to make sure this doesn’t happen again.

Assess the Current Situation

Although immediately investing additional money in the business is an obvious fix, it may only work in the short term. An option that may have a better long-term payoff is to analyze both the financial and operational aspects of your business and determine how you got into this position. According to the U.S. Small Business Administration, debt problems often trace back to poor cash flow management. Review financial statements and conduct a cash flow analysis to determine exactly how much money is coming in, how much is going out and where you might be overspending or spending unnecessarily.

Cut Spending Strategically

Cut spending in the right places and in the right amounts. Although downsizing will reduce payroll expenses and therefore increase cash flow, a small business can only downsize so far without closing the doors. In addition, layoffs come with indirect costs, such as increased unemployment insurance and decreased productivity that can make overcoming debt even more difficult. Instead, improve cash flow with tactics such as revising operational procedures to increase productivity, selling capital assets or returning leased equipment you might not need, eliminating all discretionary spending, implementing a bidding process for large purchases and using comparison shopping for smaller purchases.

Negotiate With Creditors

Transparency is vital to maintaining a good working relationship with lenders, creditors and the Internal Revenue Service. Debt.org recommends that you contact lenders, suppliers and other creditors sooner rather than later and explain your situation honestly and in as much detail as is necessary for your creditors to know. Negotiate to consolidate loans, restructure monthly payments and decrease interest rates to make payments more affordable. If you're behind on taxes, ask the Internal Revenue Service for a repayment plan, but since you’ll still be responsible for paying interest and penalty fees, repay tax debt as soon as possible.

Reorganization and Restructuring Options

Reorganize under a Chapter 13 Bankruptcy plan if you’re a sole proprietor or a Chapter 11 Bankruptcy plan if your business structure is a partnership, limited liability company or corporation. Both allow you to create a debt repayment plan in which you modify payment terms, negotiate to reduce debt amounts and, if necessary, sell some business assets. By restructuring debt obligations and modifying payment terms, a Chapter 13 or Chapter 11 plan can help you balance income and expenses, regain adequate cash flows and continue operating your business.

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