Debt Relief Sign on Desk

Proven Debt Relief Solutions for Small Businesses

10+ min read • Jan 08, 2021 • Grant Olsen

How do you fund a small business? This important question has vexed people since the dawn of entrepreneurship. And, just as there is a vast array of different kinds of businesses on earth, so are there diverse ways to secure funding:

  • Use your own money
  • Borrow from family
  • Borrow from friends
  • Obtain a small business loan
  • Use an equity raise
  • Seek venture capital
  • Bring on partners
  • Find an angel investor
  • Use equity crowdfunding
  • Use non-equity crowdfunding
  • Pursue a government grant
  • Pursue a corporate grant
  • Wait around like a character from a Charles Dickens novel, hoping your wealthy relative will leave you a fortune when they die

Depending on your situation, you might pursue a number of these potential sources in the process of building, sustaining, and growing your business. While they have distinct benefits and drawbacks, many have a similar element: they will require you to incur debt.

Although nobody particularly likes debt, it can be an important part of even the most top-notch business strategies. When you thoughtfully and responsibly take on the right debt, your business gets the fuel it needs for long-term success.

The sad truth is that about half of America’s small businesses are forced to close permanently during the first 5 years. One of the main contributors to this trend is inadequate access to capital, while another factor is an overabundance of debt. This dichotomy reveals the delicate balance between borrowing crucial money when you need it but not letting those obligations overpower your business.

“Debt is part and parcel of running a small business,” explains Forbes. “According to a 2016 report by Experian, the average US small business owner has $195,000 in debt—and that number is almost certainly rising as many small business owners have taken on additional loans or lines of credit to survive the COVID-19 pandemic. If you find yourself with more debt than you can manage, make a plan to pay it off. Take an inventory of all your debt, and rank it by interest rate and the amount of monthly payment. Prioritize the highest-interest and costliest debt for fastest payoff.”

So how do you pay off debt? How do you relieve that burden on your business, while still trying to keep your foot on the gas?

There are many different strategies. Some are ideal for moderate debt situations, while others should only be considered as last resorts. If you find yourself struggling to handle your business debts, you should consult with your financial advisor, attorney, and mentor to identify the best options for your unique situation. Their candid advice could provide the exact guidance necessary to find a navigable path forward.

If you don’t already have a business mentor, take this opportunity to seek one out now. Because having a trusted ally during financial hardship is an absolute necessity. The first place to look for a mentor is within your personal network. Think about others who have thrived in your industry and could give you advice. Browsing through LinkedIn contacts can be a great way to spur ideas.

Perhaps you don’t currently have a solid candidate in your immediate circle of contacts. No worries. Branch out by connecting with an industry association or similar networking group. You can also find possible recommendations and free resources by reaching out to your local SBA Small Business Development Center or SCORE chapter.

Possible Debt Solutions For Your Business

Worried man on laptop

Working in conjunction with your financial advisor, attorney, mentor, and other trusted consultants, review the various options available to your business. While the options for handling your debt vary, they can be categorized in 2 primary ways: preserve your business by dealing with your debts or end your business in a way that mitigates the negative consequences.

Let’s look first at ways to save your business, as this is the preferable path in nearly all situations. Some of these suggestions involve managing the debt itself, while others are geared toward freeing up more money that could then be used to pay down the debt. In many cases, it’s ideal for 2 or more options to be used simultaneously.

Reach Out to Your Creditors

It can be tempting to look for big solutions with big payoffs, but some of the quickest relief can come from a simple conversation. Before you take any other action, get in touch with your creditors. They need to know what you’re struggling with. They’ve undoubtedly spoken with many other entrepreneurs in similar situations and could have some helpful suggestions.

In some cases, the lender might agree to a restructuring of your repayment. Perhaps they will even decrease the interest rate so you have more breathing room from a financial perspective.

Bail Out Your Business Using Your Own Money

Just as business owners use personal resources to start a business, some will also go back to that original source to handle debt. This approach requires you to have the cash necessary to put a serious dent in what you owe, which can be a challenge for any business owner whose business might be struggling.

Another factor to consider with this approach is the obvious risk involved. Carefully review the situation before deciding whether it is reasonable to use your money in this way. When done correctly, paying off debt with your own money can alleviate the pressure and put your business back on the road to success. In other cases, it can lead to severe financial consequences.

Lower Your Business Costs

When you’re spending less money on various costs, you have more financial firepower to throw at your debt. Work with your team to find ways to save money on your recurring expenses. This might include putting off the hiring of additional staff, reducing the amount of money you spend on utilities, or finding a more affordable internet provider.

At the same time, look for ways to offset your remaining costs by making extra money for your business. Consider selling computers and other electronic devices that aren’t needed or renting out some of your lesser-used equipment.

Work With Your Suppliers

Communication is always essential when you’re dealing with financial strain. Reach out to your suppliers and explain the situation. If you have established a good relationship with the supplier, you can expect them to be empathetic with your position.

Ideally, your suppliers will offer solutions. For example, they might help you find comparable products that come with a more affordable price tag. Or they could hook you up with a discount on your orders. In some situations, they might even arrange for deferred payments so you can put your money toward immediate debt relief.

Work With Your Customers

You can also work things from the opposite direction by connecting with your top customers. If you have customers who owe you money, you could incentivize them with the same type of discounts you sought from your suppliers. It might be better to get a slightly reduced amount of money today than the full amount in 3 months.

Consolidate Your Loans

While many of the suggestions thus far on the list have been of the à la carte variety, this is a much more substantial way to relieve your debt. When done correctly, consolidating your loans can potentially bring the following benefits:

  • Only one creditor to deal with
  • Only one payment to manage
  • Lower interest rate
  • No negative impact on your credit

The way it works is a debt consolidation company or nonprofit lender agrees to take on your various debts. They pay the remaining balances on your outstanding loans and then “consolidate” everything into one monthly payment.

Not only does this arrangement simplify your life and save you time, but it can also provide a lower interest rate. To qualify for a debt consolidation loan, you might need to secure the loan with business assets such as property, real estate, or equipment. If you find yourself unable to meet the terms of this new loan, you would need to forfeit your assets.

File for Chapter 11 or Chapter 13 Bankruptcy

This is hardly the preferred route. But if your business faces financial demands that are temporary in nature and you feel you have long-term viability, bankruptcy might be a potential solution.

You should know in advance that bankruptcy is a costly process. And the amount of paperwork and hoop-jumping required can be daunting. But if you have the assistance of a trusted attorney, you can determine whether or not this is a good solution.

A bankruptcy can often work when your total debt exceeds the value of your business assets. With Chapter 11 and Chapter 13 bankruptcies, you basically renegotiate debt and pay the asset’s value, as opposed to the total amount you’d otherwise owe. Chapter 11 bankruptcy is for businesses such as corporations or partnerships, while Chapter 13 is used for sole proprietorships.

Any type of bankruptcy will impact your credit in a major way. This results in difficulty obtaining loans down the road. Even when you are approved, the interest rates and terms will be much less favorable than before your bankruptcy. But bankruptcy is still an option that should be considered. Thousands of small business owners file for bankruptcy each year, and many of them are able to continue on with their entrepreneurial dreams intact.

Ending Things With Your Business

Man Struggles to Handle News

In some extreme cases, you may feel that you lack viable solutions for your debt burden. And you could just be ready to end your relationship with your business. Here are some potential ways to carry out that plan:

Sell Your Business

You can seek a buyer for your business, then use the money from the sale to cover your debt. A major snag emerges when your debts exceed your assets, as it becomes much harder to find buyers.

Liquidate Your Assets

This could be a solid option if you have valuable assets. Once you’ve liquidated your business, you can arrange the distribution of assets with your creditors. In most cases, they’ll allow you to settle the debt for less than the full amount, as nobody wants to wade into the complex and expensive waters of bankruptcy or litigation.

File for Chapter 7 Bankruptcy

Your final option is to make a clean break from your business via Chapter 7 bankruptcy. In this scenario, a trustee takes control of the business in order to collect accounts receivable, sell assets, settle taxes, and then turn over whatever remains to the creditors you still owe money.

Of course, there’s no such thing as a completely clean break in these situations. Although you will be freed from all your business’s debts, your personal credit takes a beating. For the next 7 years, you’ll find it difficult to qualify for most loans.

Understanding Your Financial Health

Man happy with cup of coffee

There have been multiple references in this guide to your business and personal credit scores. It can’t be overstated how important they can be to the opportunities available for your business, but many small business owners still prefer to keep their heads in the sand. But ignorance isn’t acceptable. You need to know where you stand before you can know where you’re going.

“Credit scores help prospective lenders evaluate the risk they assume when they offer you financing,” says finance expert Gerri Detweiler. “Just as lenders may review your personal credit reports or scores when you apply for a credit card, mortgage, or auto loan, lenders may review business credit scores when you apply for small business financing. The 2019 Federal Reserve Small Business Credit Survey found that 13% of business owners used just business credit when applying for financing, and another 41% used both personal and business credit. While most people are familiar with personal credit scores, business credit scores are often a mystery; it can be helpful to understand how they work.”

When you apply for a loan, most lenders will leverage a credit score bureau to find out more about your financial history and habits. The most commonly used resources are:

You might not be able to contact these bureaus and get the same reports that a lender would, but there’s absolutely no excuse for not checking your credit on a regular basis. There are multiple ways for you to conveniently accomplish this. Better yet, many of these credit sources are free of charge. Here are a few of the most popular methods:

  • Credit.net: Here’s one of the most robust services available, as it provides you with an expert consultant who can advise you on credit-building strategies. There’s a fee involved for long-term use of Credit.net, but you can always do the free trial, which provides credit reporting for 1 week.
  • CreditSafe.com: Not only does this website connect you with credit reports, but you’ll also get access to a variety of monitoring tools. Managing your credit is always easier when you have financial resources of this caliber.
  • CreditSignal: This service only lets you view your Dun & Bradstreet credit report, rather than the wider variety of bureaus that are available through many other credit monitoring websites. But this is still a user-friendly option with plenty of helpful features.
  • Your small business loan application: While you should strive to monitor your credit score on a consistent basis, here’s a helpful touchpoint that is totally free of charge. Any time you are denied for a small business loan, you’ll get correspondence from whatever credit bureau the lender used while checking your credit. Simply respond to that letter and the bureau will send you a complimentary business credit report.

Your credit report will likely bear witness to the ups and downs of entrepreneurship. The life of a small business owner has always involved risk. So don’t be shocked if your score isn’t necessarily noteworthy.

But even if your score excludes you from qualifying for certain loans, there are small business financing products specifically designed for situations such as yours. Rather than focusing on business credit for these products, lenders will use other metrics in their decision-making process. This makes it possible for you to connect with the money you need to get your business back on track.

Let’s look at 3 of the best options:

  1. Merchant cash advance: Rather than looking into your past performance to determine approvals, lenders will project your future earnings for a merchant cash advance.
  2. Business line of credit: One of the easiest forms of financing to obtain, a line of credit can provide a real boost for your business.
  3. ACH loan: The performance of your business is what really matters when applying for an ACH loan, making your credit score part of the tertiary considerations.

By monitoring your credit, looking for ways to save money, and seeking out strategic financing, you will put yourself in the best possible position to manage your small business debt. Even if you are ultimately required to take a more drastic route, at least you gave yourself the advantage of every possible option. And these proactive steps will pave the way for future success, regardless of your present outcome.

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Grant Olsen

Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.