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Options to Confront and Manage Business Debt

Half of all small businesses fail within their first five years because of insufficient capital, poor credit arrangements, and business debts. The difference between a successful business and a struggling business is taking on the right amount of debt at the right time. When dealing with business debt, there are a few options to change a struggling business to a successful one.

Borrowing in business makes sense in order to create a cash flow, financial growth, or expand. However, there is a fine line and it is easy for small businesses to overextend themselves by borrowing too much without the capacity to make back what is owed.

There are two main ways to deal with debt. First is to save the business while settling debt. Second is to allow the business to fail, but with a well constructed exit strategy. This means financial consequences will be less.

In order to save the business, it may require taking money out of pocket to put into the debt payoffs. This is considered a calculated risk that could fail as easily as succeed. This option should only be done if it can be justified as a short term tactic that promises a long term payoff.

If private funds do not work, then areas need to be identified where costs can be reduced. An unused space could be subleases. Unused equipment could be sold off. The workforce could be reduced, although this is not attractive and has other consequences that come with it.

Talk to customers often to figure out how to increase exposure and improve the business model to earn more revenue. Offer best customers markdowns if they pay quicker. Contact suppliers to arrange discounts or deferred payments.

Creditors should be contacted and informed of the current debt situation. Ignoring lenders will make the situation worse. Tackling a debt problem in the early stages will make the process easier to resolve. It is in everyone’s best interest to find a solution, so lenders should work with businesses to lower interest rates, increase the credit line, and restructure repayment options.

Dealing with multiple creditors or collection agencies can take away from the important responsibility of running the business. If this is the case, debt problems should be outsourced to a professional debt settlement consulting company. Reputable consultants can negotiate with creditors on behalf of the business to settle debts for less than what is owed.

Loans can be consolidated into one payment that can be reduced into monthly costs without negatively affecting credit. Business debt consolidation loans allow owners to deal with a single creditor as opposed to many. This could allow for a loan with a lower interest rate.

This process works best when using a debt consultation company. They will negotiate a new loan, collect payments from the business, and pay off previous creditors. The loan can be unsecured or secured with business assets.

The last resort option is a Chapter 11 bankruptcy. This route is only used to salvage a company for parts. Do not choose this option is the business debt is temporary and the company is otherwise viable.

Bankruptcy is an expensive and complicated process that requires services of an experienced bankruptcy attorney. This is not an option for simply reducing debt burden. If the business assets are worth less than the debt, bankruptcy allows owners to pay only what the assets are worth and not the entire balance due.

If a business is on life support with unmanageable debt, shutting the business down may be the best option. Do not just close the business without settling debt or else creditors can sue owners or go after personal assets. There are a few options for failing a business.

Sell the business to pay off lenders. Liquidate assets and negotiate with creditors for distribution of assets. Declare a Chapter 7 business bankruptcy to turn over the business to the bankruptcy trustee. In a Chapter 7, assets will be sold, outstanding accounts receivable will be emptied, owed taxes will be paid, and remaining funds to creditors will be distributed.