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A healthier bottom line is what every business aspires to, and maintaining an active focus and strategy on financial debt management is a critical factor in achieving this goal. As I advise my clients, “debt” doesn’t have to be a dirty word – it’s a healthy part of any sustainable business when operated properly. Reducing debt and, by extension, its potential to negatively impact business stability should always be a priority for business leaders. These are the considerations that I always recommend my clients to pursue for this purpose.
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1. Renegotiate and restructure loans with existing lenders
This is an option that is not well known and rarely communicated by debt service agencies, but is plausible for businesses of all sizes. In all cases, lenders make the same considerations as other business owners. It is generally better to retain customers during tough times via reduced margins on management fees rather than having a loan in default or transferred to a collection agency with an indeterminate outcome. In some cases, additional context may be needed to explain to the lender the negative impact that current fees or loan conditions have on the creditworthiness of the borrowing company (sometimes referred to as a “hardship letter”). The results may include waiving or reducing administrative costs, lowering interest rates, or changing payment schedules, all of which can be beneficial.
2. Consolidate and reduce management costs for a more advantageous loan
Evaluating ways to alleviate a company’s debt is a very viable option, depending on whether conditions are favorable and additional administration or termination / setup fees do not introduce new burdens in the short term. A recommended option for small businesses is the 7 (a) loan program of the Small Business Administration (SBA), which has simple qualification criteria (which may be more stringent than other lenders) and an application process which may be more complex, but with attractive rates and the benefit of being serviceable by local lenders with the SBA providing the collateral. A business line of credit (also offered through the SBA) can be another great option with advantageous rates and longer payment terms than traditional lines of credit.
Related: SBA loans: an introduction
3. Pursue subsidies as a debt transfer option
Grants or similar forgivable loans should not be overlooked as options for offsetting debt. In addition to high-profile grants launched in response to emergency circumstances (such as the current pandemic), There are many ongoing grants available that apply to almost all industries. These grants can come from national and regional economic development groups, as well as non-profit organizations or other non-governmental industry organizations. As these grants can sometimes be narrowly focused on supporting a specific region and / or industry segment, it is essential to read the fine print on applicability.
4. Manage accounts receivable
A particular focus on collecting unpaid payments owed to your business is essential to ensure a sound financial basis for continued operations. Applying shorter payment terms (for example, 30 days net instead of 90 days net) can provide additional certainty about the state of the company’s finances. While renegotiating payments for established clients may be impractical, it may be possible to consider quick salary discounts or take advantage of a certified debt company willing to provide 85% or more of the amount owed to the client. advance and bear the burden (and risk) of late payments.
Consider the balance between long-term customer retention and your company’s opportunities to ‘pay it forward’ and build loyalty by allowing reasonable flexibility with payment terms for customers who also face challenges in the business. current business environment.
5. Find creative options with your vendors and suppliers
When your business debt is intended to support expansion, inventory, or vendor services, consider entering into deferred payment agreements with these entities. These models may include risk-sharing agreements with payments based on the conclusion of downstream service or product sales. This is something that is rarely taken into account when suggested to my clients, but rethinking and evolving business relationships from a simple supplier to that of a partner or investor can be transformative, often in times of threat. . Entering into such agreements must be done with a clear understanding of the risk and reward, and as much objective legal and financial expertise as is necessary to ensure mutually beneficial outcomes for both parties.
Again, it’s important to understand that debt is a healthy (and necessary) part of the continued operations and growth of any viable business when managed properly. Where debt reduction can strengthen the long-term viability of your business, one or more of the strategies outlined above should be applied to help achieve this outcome.