Increasing numbers of Americans are starting their own small businesses. Working for yourself in a startup has many advantages; you can set your own hours and determine what services or products you want to sell, as well as how to sell them. However, managing a small business is often a financial challenge. Many small business owners face debt, especially in the first few years.
If you are dealing with small business debt, you are not alone. A recent Gallup poll shows that 49% of business owners struggle to manage their debt. Debt also does not mean your startup will fail. On the contrary, you can manage debt and continue growing your business if you have the right tools.
Increase Cash Flow
Increasing cash flow is one of the easiest ways to begin managing debt, and there are several ways to approach it. First, take a good look at your business’ productivity. Ask yourself what skills your employees have, which they need, and how you can increase everyone’s skill sets. For example, if you own a café, you may have several employees who are great at cooking or customer relations. However, you may not have many people on board who are comfortable with technology. Offering training and seminars on topics such as how to build and manage a website may be a wise idea. Invest in new software and devices for the business. This will increase costs in the short term, but lead to greater cash flow.
Additionally, examine how you approach selling products or ideas. If certain merchandise isn’t moving, it might be because customers are too used to your sales methods. Those customers may also feel your business doesn’t serve their particular needs. Speak directly to customers as often as possible. Ask them what they like about your products, services, and sales methods and what they don’t like. Be open to their suggestions and consider using new marketing initiatives.
Factoring can also be an option. Working with upfront capital can give you time to creating a new business plan.
Consider Loans Carefully
Most people assume the quickest way to deal with debt is to take out a loan. Loans can help, but you should be careful about which ones you take and when. Calculate your debt coverage ratio first so you can determine how easily you can pay back a loan. Additionally, don’t ask for the largest loan possible. These are usually the most difficult to pay back, partially because they involve a series of incremental payments. These types of payments are easy to default on, which only increases your debt.
Reconfigure Your Budget
When dealing with small business debt, budgeting should be one of your first moves. Sit down and spend time reconfiguring your budget. Don’t try to make huge cuts; you’ll end up feeling overwhelmed and unable to meet customers’ needs. Make smaller cuts in as many areas as possible.
Let’s return to the café example. If you’re in debt, your first inclination might be to lay off some employees or cut the menu in half. Both these choices are mistakes. You would risk hurting employee relations and getting rid of signature dishes that made your customers patronize your business in the first place. Instead, swap small menu items such as side dishes for less expensive ones. Ask your food suppliers if discounts are available or if you can renegotiate prices for expensive items like organic produce or certain meats.
Additionally, you can cut costs regarding space or equipment. If you have a large building, consider renting or subletting it to another business in your area. If you’re using nonessential equipment, sell it or downgrade to less expensive models. When possible, put off major projects such as remodeling until you have your debt under control.
File for Bankruptcy
Bankruptcy doesn’t mean you will lose your business. Actually, filing under Chapter 11 can keep your business alive. Before filing, however, consider the kind of debt you have. If it’s temporary and the company is still viable, and if you have the money to hire a bankruptcy attorney, filing may be your best solution. Your attorney will guide you through how to approach getting out of bankruptcy. For example, he or she may advise you to pay only what your assets are worth, if they are worth less than your total debt.