LETTER : How to Pay Off Your Business Debt and Improve Your Finances
As per a survey conducted by Fed Small Business, around 80% of small businesses in the United States have outstanding debt. The amount of debt owed by businesses ranges between $100,000 to more than $1 Million.
As a business owner, dealing with debt can be stressful. However, the best way to tackle it is to address it head-on. In this article, Faboppa presents various effective steps you can adopt to help your business get out of debt.
Control Your Debt
For starters, it’s important to remember that you can have good debt. As ZenBusiness explains, some debt can work to your advantage and help you increase profits, particularly when you use the funds to cover their costs. The trick is separating the good from the bad. Starting with your credit cards.
Instead of using credit cards or other lines of credit to pay for business expenses, opt to use cash. As a result, you will prevent increasing your debt while working toward paying off your existing liabilities.
Allocate a fixed amount in your budget to cover these expenses using cash or cash equivalents such as checks. This allows you to control your spending and lower your expenses.
Negotiate with Lenders
Communicating with your lenders regarding your financial situation can help gain assistance in repaying your debt. Here are some options you can explore:
● Reducing Credit Card Debt: Contact your credit card provider to discuss alternative repayment options. You could be eligible for transferring your existing high-interest debt to a 0% APR (Annual Percentage Rate) credit card with a lower interest rate.
The advantage of such a transfer is twofold, For a limited introductory time period (typically 12 months) you will not be charged interest on purchases made using the new credit card. After the introductory period, the interest rate charged will be less than your previous card. As a result, you can reduce interest payments by thousands of dollars.
● Applying for a Hardship Program: As reported by Credit Repair, these programs are provided by lenders for clients facing financial difficulty which prevents them from making the required monthly payments.
To apply you need to submit a hardship letter explaining your financial position and the intent to pay. It is advisable to communicate with your lender before your account goes into collections. If approved, your lender could reduce interest rates and provide a revised system for payments.
In addition to these, small businesses with numerous high-interest loans commonly opt for consolidation to reduce their debt burden. It involves clubbing various loans into a new single loan with a lower fixed interest rate.
Follow the Stack Method
Also referred to as debt stacking, this method helps to periodically reduce debt and allows you to gain control of your finances.
First, make a list of all your debt sources. Second, ensure that you pay the monthly repayment amount for all, as missed payments can incur heavy penalties. Next, allocate any extra money you generate towards paying off the debt with the highest interest rate. As a result, you pay off your high-interest debt first, significantly reducing your repayment burden in the long run.
Increase Your Income
The fastest way to pay off debt is to earn more. While that is easier said than done, here are a few effective ways to increase your income:
● Social Media Promotions: Create a page for your business on major social platforms and showcase your products. You won’t need to spend a dime and can connect with your customers directly, build brand awareness and increase your sales.
● Tax Reductions: Register your business as a Limited Liability Company (LLC) to reduce your tax burden. With an LLC you can use business expenses such as transportation, advertising, maintenance, and more as tax write-offs. Additionally, you will avoid double taxation as LLCs do not need to file federal taxes. Research the tax filing benefits an LLC provides in your state.
● Make Operational Changes: If you own office space, consider leasing a part of it to other businesses or sell it and switch your business online. Similarly look for ways you can generate revenue from other assets, through use or sale.
● Evaluate How You Bill Clients: If the system you have in place to invoice clients has resulted in missed income, you may need to head back to the drawing board. If you don’t already, supply clients with both hard and digital copies of contracts and invoices.
By adopting the above-mentioned steps, you will notice a positive impact on your business finances. It is important to be consistent in your efforts and make debt reduction a business priority until all your liabilities are paid.
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