The U.S. government, according to many experts, is on the brink of default in less than a week. If the nation’s credit limit is not raised, then starting on Tuesday, President Obama and Secretary Geithner are going to have to make the tough decisions on who to pay and who not to pay. From the beginning of our nation when President Washington and Secretary Hamilton made the difficult decision to honour all debts, our nation has met its debt obligations, and hopefully that nearly perfect record (I do believe we missed some debt payments in 1979 due to an administrative error) will remain intact well into the future.
All this debt talk has made me think about small business debt. Although small business debt is different from government debt (and thus handled differently), one thing is certain for both: unpaid debt can be catastrophic. A business that fails to make a debt payment will have that failure recorded for seven years, making it more difficult and more costly to receive additional credit in the future. So, as our politicians attempt to figure out how to best manage our nation’s debts to avoid default, here are some ways to manage small business debt to avoid default.
1. Revisit your Budget
The threat of default occurs because something didn’t work as intended. Whether the threat of default is near or far, it’s a good idea to revisit your budget every quarter to make sure that all your finances are in order. If the threat of default is close, then it is imperative to figure out how your business got into that situation and do whatever it takes to fix that situation. Not taking timely action may end with you in court and someone else telling you what to do with your business.
2. Cut the Fat
Look at all of your expenses and see if there is anything you can cut. Eliminate any unnecessary office space and costly services. Sell any unused equipment. If necessary, adjust your payroll to avoid default.
3. prioritise Debt
List your debts according to interest rates with the highest rates on the top of your priority list (regardless of total debt amount). Also, list any debt that is personally secured/guaranteed high on your list as well. Prevent personal liability as much as possible by ensuring that these personally secured debts remain in good standing.
4. Negotiate with Creditors
Creditors care about one thing: getting their money back (with interest). It does them no good to have a debtor in default. Explain your hardship to your creditor and request better payment terms (i.e. temporary lower payment, reduced interest rate, or longer repayment period). If that doesn’t work, then request a payment plan or a reduced settlement amount. Be sure to give an explanation on how these modified terms helps your business become viable, thus ensuring the creditor that you will be able to pay your debt back. Also consider consolidating your debts to possibly lower your interest rate and simplify your debt into a single payment.
5. Collect debt owed to you
Often, a business finds itself in a debt crisis simply because someone won’t pay a debt back to you. With so many business debts due on a monthly basis, failure by a single customer/client to pay you his or her debt means your business will not have the funds to pay back its initial debt to someone else. In these instances, do what you can to collect the debt owed to you. Hiring a lawyer may be too costly, so here are some alternatives:
- File a small claims action – small claims actions do not require a lawyer and can be done quickly and efficiently. Generally, if the debt amount is small (ranging from $1,500 to $25,000, check your state), this may be the best course of action.
- Hire a mediator – cheaper and faster than hiring a lawyer, but not 100% guaranteed to result in a settlement
- Hire an arbitrator – cheaper and faster than hiring a lawyer, but not 100% guaranteed to get it your way (unlike a mediator, the parties are bound to an arbitration decision)
- Hire a collection agency – more expensive than the above options and possible rejection from the collection agency (they tend to accept cases where there is a high chance of success), but cheaper than a lawyer.
- Contact your state’s credit bureau – as a final resort (before “lawyering” up), you can threaten to notify the credit bureau of your debtor’s delinquent activity.
6. Get Help
Dealing with certain creditors may be difficult. Getting help dealing with your debt may be the best solution. Look for nonprofit organisations that are willing to work with small businesses. Depending on your situation, nonprofit debt-management professionals can help guide you through your business debt problems. However, for complicated business debt issues, hiring a bankruptcy attorney may be your best solution.
Remember, the goal is not necessarily to get to zero debt. Debt is not bad by itself. Debt that cannot be paid back is bad and so the goal should be to have a budget where debt repayments won’t hinder your business.
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