Advice for Minimizing Small Business Debt

When the housing industry caved in back in 2008, it turned a lot of small businessmen into out-of-business men.

Tom Murphy was nearly one of them.

Murphy owns a plumbing company that sprang a few leaks when the Great Recession hit. He employed 23 people and did more than $2 million in revenues in 2007. By the end of 2009, his revenues plummeted more than 50 percent and only 11 employees were left.

“I was in survival mode,” Murphy said, “I watched every dime that came in and every nickel that went out.”

He also watched several small businesses, including some of his competitors, fold up shop.

“They got overwhelmed by debt,” Murphy said. “Guys were letting their egos run their business, spending money on million-dollar buildings and equipment and labor … and it all came back to bite them.”

Staying ahead of debt, and sometimes ego, might be the toughest battle small businessmen face. Fortunately, there are some common sense and easy to execute steps for minimizing debt:

• Do the math. Some small-businesses owners need a spreadsheet to budget, others can eyeball the numbers and get them right. Either way, be sure that you absolutely need and can afford whatever you’re looking at buying. If you can’t afford it today, don’t buy it — especially with credit! Yes, there are some risks that work out, but taking on too much debt is the primary reason 25 percent of businesses fail in the first year. About 50 percent go under by the end of the third year.
•  Don’t waste space. If you have more room than you need, consider subletting a portion of your facility. The same thing applies to equipment that’s sitting unused. You can rent or sell it to someone who needs it.
• Price matters, even if it’s higher. The goal of every business is to take in more than you spend and sometimes the only way to do that is to raise prices. Murphy bumped the price of calls $10 an hour during the worst of times, but it helped him cover enough costs to keep going.
• Shop around. Some business expenses are negotiable. You may get a better deal on insurance, rent, cellphones, office supplies and materials by offering your business to a competitor.
• Incentives work. Companies that have to wait 60 to 90 days to get paid sometimes don’t see a check for six months. That can be a business killer, especially on big jobs. Give your customers an incentive to pay within 30 days. There are a lot fewer cash-flow problems when money is coming in every month.
• Stay interested. If you don’t know your banker, go ahead and introduce yourself. Ask them to call you when interest rates change for business loans or credit cards. A slight change in either one – preferably both – can help you stay afloat.
• Get an umbrella. It’s amazing how many small businesses have no “rainy day fund ” to protect them during slow times. If you don’t have one, you might have to cash in an annuity, an IRA or 401(k) investment plan to help you ride out the rough times.

“I was lucky,” Murphy admits. “I didn’t take on much debt. I lived within my means, but it’s a good thing I had a rainy day fund because that helped me get through some bleak months.

“What I learned was that if you use common sense and have a good grasp of math, you can survive in business.”

Bill Fay is a writer for Debt.org, focused mainly on news stories about the spending habits of families and government. He spent 21 years in the newspaper business and eight more in television and radio, dealing with college and professional sports, then seven forgettable years writing speeches and marketing materials for a government agency.

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