If you’re like most small business owners, at some point you have robbed Peter to pay Paul. While this technique may buy you some time to generate additional income to cover past due bills, it does not offer any solid strategies to overcome and eliminate the debt that may threaten to permanently damage your company. According to the Small Business Administration (SBA), about 40,000 businesses shut down or file for bankruptcy every month. And while some of these closures are due to improper planning, many falter because they are deep in debt.
“The ones that do fail, 99% of them fail because they have a cash restriction,” says John Bjeldanes, a counselor with SCORE, a resource partner of the SBA. “They simply allow their accounts receivable ledger to get too large and run out of cash to operate the business, they have far too much inventory (that they can’t move), or they finance the business with accounts payable, lines of credit, or short-term debt like high interest credit cards of 18% to 20%. As a result, people are forever trying to categorize the bills according to who they’re going to pay first, second, and third, rather than looking at the overall structure of the debt and the structure of the business.”
Lathea V. Morris, co-founder of The Credit Alternative Group L.L.C., says paying business debts begins with having a good marketing and financial plan that includes a detailed budget.
“Regardless of how passionate a business owner is about their business, they absolutely have to make sure that the numbers work,” Morris says. “You have to make sure that you generate enough income to pay your debts and hopefully enough for other business activities, such as marketing, that are going to help you to generate more income,” she says.
To help entrepreneurs tackle their debt, SCORE and Corporate Turnaround, a debt restructuring firm, have created How to Pay Business Debts You Can’t Afford, a 16-page workbook that gives business owners advice on how to settle commercial debts.
“The easy-to-understand strategies in this guide have helped settle more than 25,000 business debts,” says Jerry Silberman, CEO of Corporate Turnaround and co-author of Small Business Survival Book: 12 Surefire Ways for Your Business to Survive and Thrive. “SCORE clients will learn how to explain their hardship directly to their creditors and gain the best possible settlements,” he says.
The workbook, which is free and downloadable at www.score.org, instructs business owners to begin tackling their debt in these steps:
1. Restructure the debt: Debt restructuring is a process by which you negotiate new payment terms with your creditors. It includes expanding the time period that you are given to pay back creditors and/or reducing the amount you owe. First determine whether your company needs to incorporate such a process. If at least 30% of your payables are more than 90 days old, you can’t pay current bills or past due bills,