Achieving Debt Freedom for Small Businesses


Kevin Sage

May 13, 2024


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Accounting & Finance

Unsustainable debt can sink a small business faster than that glacier sank the Titanic. Fortunately, by knowing the right signs to look for and strategies to avoid them, you can reduce your current small business debt and prevent accruing insurmountable debt in the future.

Red Flags of Unsustainable Business Debt

There are many signs that your business debt has gotten out of control, including:

  1. Missing payments
  2. Borrowing more money to pay current debts
  3. Business credit scores declining
  4. Borrowing options are increasingly limited

Top Tips for Reducing Small Business Debt Now

Person saving another one from financial debt

Any one of the below suggestions alone can help you reduce small business debt measurably. Combined, they can help you reduce that debt significantly and avoid building it back up again.

Shore Up Your Budget

Review your budget as it currently stands, then revise it as necessary to eliminate unnecessary debts. Learn to run your business within your means. If you must take on debt, make sure you know what it’s for and how and when you’ll be able to repay it.

To best do this, take an inventory of all your debt. Look through the bank and credit card statements from the past year or a few months to itemize expenses. Identify:

  1. The type of debt
  2. Balance due
  3. Size of payments
  4. Fees and interest charged
  5. Terms for repayment

Next, analyze your revenues. Whether you're reviewing your existing budget or devising one from scratch if you don’t have one already, here are some key points to look for:

  1. Look for trends in spending, like revenues that have dropped off or costs that have steadily increased.
  2. Categorize revenue sources and expenses for easier analysis.
  3. Calculate the amount of cash you can afford to allocate to pay off your current debt and prioritize how you will allocate that cash according to your needs and the costs of the corresponding debt.

Hire a CPA

To be successful, a small business should have a certified public accountant helping them track and analyze revenues and costs. The trick is finding the right CPA for your small business. Learn what to look for and ask around in your industry for referrals to quality CPAs to consider.

Cut Costs

Cutting Expenses

You may be making payments automatically each cycle without even realizing it. By making yourself aware of all your expenses and how and when they get paid, you can adjust them as necessary to reduce costs.

Examine every expense and classify it according to these distinctions:

  1. Essential and non-negotiable—These are expenses you must pay, and you cannot lower them without making major structural changes, such as payroll taxes.
  2. Essential and flexible – These expenses are necessary for running your business properly, but their costs, such as insurance and benefits, are not fixed.
  3. Non-essential—These are expenses that may be frivolous, redundant, or otherwise unnecessary for you to run your business, such as redundant equipment or staff.

There’s nothing you can do about essential and non-negotiable expenses. However, you can lower essential but flexible costs by negotiating lower rates and fees from your existing suppliers or providers or switching to new, lower-cost suppliers or providers. You can also eliminate unnecessary expenses.

Employ a Debt Reduction Strategy

By choosing and sticking to a debt reduction strategy, you can reduce small business debt almost on autopilot. Here are two of the most common strategies for reducing small business debt:

  1. The Spartan Strategy – Pay only the essentials and avoid paying for anything else until those essentials are paid off.
  2. The Percentage Strategy – Dedicate a certain percentage of profits to paying down extra debt and apportion it according to your criteria.

Whatever strategy you choose, it’s almost always best to pay down your most essential and highest-cost debt first.

Consolidate Small Business Debt

Just because you have to pay some expenses, that doesn’t mean they have to cost you as much in interest and fees. You can consolidate all your debt into a single payment, often at a lower interest rate and with fewer and/or lower fees.

There are at least two other benefits of consolidating your diversified debts into a single debt. One is that your original debtors are paid off, putting you in good standing with them. Another is that you only have to keep track of one recurring payment rather than many, helping you avoid missed payments and late payment fees.

Automate Payments

Person enrolling to Autopay

By automating debt payments, you also avoid missed payments and late-payment fees, as well as harming your business credit score, which would make it harder for your small business to qualify for future funding. Automating debt payments also helps you avoid negatively impacting your small business’s cash flow.

Boost Revenue

Two powerful ways to reduce small business debt are to save money by economizing expenses and making repayment more efficient. Another is to increase the income you’re generating to pay these debts. That way, you can pay them down quicker and, ultimately, cheaper by avoiding unnecessary interest charges.

Fortunately, there are at least as many ways to boost revenue as to economize expenses. Here are some of the key ones:

  1. Attract new clients and customers.
  2. Expand your services or product lines.
  3. Cross-sell and upsell

Court Investors and Apply for Grants

State Grants application

Another powerful way to boost revenue and cut expenses is to seek other sources of funding than debt. Two of these sources are investors and grants.

Many investors may expect some sort of ownership stake or share of profits in your business but not expect you to repay their investment dollar-for-dollar on a particular schedule with interest. These investors only succeed in reaping benefits from their investment if you succeed in your business. There are also angel investors who expect nothing in return but the satisfaction of helping you succeed in your small business.

There are also many small business grants you can apply for that never have to be repaid and don't require you to give up any of your business ownership or profits to the grant provider.

Contact us right away to discuss how review management software can help you and your small business achieve debt freedom by boosting your small business revenue.

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