As a small business owner, it’s common to have some debt. If you’re paying off debt that has low interest rates, long terms, and monthly payments that you can manage, you’re generally in a good place.
However, not all debt is created equal. For instance, credit cards and lines of credit often come with higher interest rates, shorter payment terms, and monthly payments that may disturb your small business’s cash flow.
8 actionable debt consolidation strategies
If debt is making it hard to keep your head above water, these eight debt consolidation strategies may help you pay off your debt faster, improving your bottom line.
1. Stay out of the headlock with healthier financing options
They say the best way to get out of a headlock is to avoid getting into one. Similarly, the best way to improve your debt situation is to try to acquire less bad debt in the first place. Before taking out a loan, consider these questions:
- What are your current expenses?
- Where are you profiting?
- Where do you need financial support?
Depending on what you need the money for, a credit card, for example, may not be your best option. A small business loan may often offer better terms, helping you save money and minimize your debt in the long run. For example, if you need working capital to purchase equipment or meet payroll needs an SBA 7(a) loan or a bank term loan may be the right fit.
Before taking on debt, compare and contrast your options, looking specifically at:
- The interest rate
- The terms
- Your monthly payment
- The total cost of the loan
2. Consolidate your debt
Consolidating debt involves taking out a new loan and using it to pay off others. In order for this to make sense financially, the new loan should have a lower interest rate than your current loans. The practice of consolidating debt appears to be growing in popularity. Some statistics show that the percentage of business owners applying for a loan to refinance and pay down their debt went from 30% in 2019 to 32% in 2020.
SmartBiz® Customer Milton Martinez explains how debt consolidation with an SBA loan was the right strategy for his business. “By getting rid of two small loans, I’m saving $15,000 to $18,000. That’s money I can put back into growing my business or into savings.”
Shifting all of your credit card balances to one card is one way to consolidate debt. But beware, once the interest kicks in, it may get very expensive very quickly. You also need to be mindful of balance transfer fees. This is why debt consolidation loans may be a better option.
3. Free up some of your revenue
Part of your consolidation strategy may include cutting back on expenses that don’t save you time or money. Consider these questions:
- Are you paying for expensive office space when your team could be working remotely?
- Are you handling something in-house that you could outsource more affordably?
- Are you paying for monthly subscriptions that you don’t really use?
Take audit of your monthly expenses and consider making some cuts - no matter how small they might seem - to pay off your debt.
4. Explore cash infusions
If cash flow is king, quick cash infusions are generally queen. Do you have equipment or machinery you don’t use? Consider selling it to another business! Do you have excess inventory that’s been sitting around? Consider running a flash sale. Do you run a business that could sell tickets to classes or webinars? Consider notifying your audience and start organizing an event. Cash infusions may bring your small business one step closer to being debt-free.
5. Prioritize your payments
Are you paying off multiple credit cards? There are generally two ways to approach this:
- Pay off the card with the highest interest rate. This often means you’ll pay less money in total.
- Pay off the card with the lowest balance.
The second strategy will likely give you a quick win (which is always nice), the first one generally saves you the most money. Whichever course you choose, make sure you consider both the immediate and longer term impacts of that choice for your business.
6. Renegotiate your debt
Negotiating is a bit of a lost art, but it just might work in your favor. Creditors want their money, and, sometimes, they’re willing to be flexible. You can try requesting an extended term loan in exchange for lowering your monthly payments, or a settlement where you pay less than what you owe. You’d be surprised what you may get simply by asking.
Don’t forget, too, that some creditors have programs specifically designed for businesses facing financial hardship. In such a case, ask your financial institution about your options.
7. Embrace good debt
As you now know, there’s good debt and there’s bad debt. Good debt can generally offer unique benefits. For example, let’s say that you used the money to purchase a piece of equipment that will help you make your products faster. Or, if you qualified for a low-interest SBA loan via SmartBiz, you could generally use that to pay off debt with a higher interest rate. In both scenarios, the strategic debt may ultimately increase your bottom line.
8. Create a budget and stick to it
Having a plan of attack is often integral to the success of your consolidation strategy. As a savvy small business owner, you likely know to expect the unexpected.
Your budget should generally go beyond regular monthly bills and the extra money you want to put toward debt. You may also want to consider putting money toward an emergency fund, to avoid being caught too far off guard. Additionally, you should aim to account for less frequent expenses, like renewing your business licenses or extra staff and inventory around the holidays.
Don’t forget, too, to budget for the “nice-to-haves.” Just because you have debt doesn’t mean your small business shouldn’t be allowed any discretionary spending.
Consolidating debt requires a strategy
Your small business may be able to operate with less debt. The key is generally knowing where you stand and following a strategy that can help you reduce your financial obligations and shore up the cash you have on hand.
