Avoid Debt Like the Plague

Posted 2 years ago in Small Business Tips
by Jenny Rollins

According to the American Bankruptcy Institute, over 58,000 businesses filed for some sort of bankruptcy protection in February 2017.

Many of those business are seeking debt restructuring so that they can bounce back stronger than ever, but not all businesses do.

Small businesses are the growth engine of the US economy, but there is plenty of creative destruction along the way. The way that a business views debt can have a big impact on whether it is successful in the long run.

Not all debt is bad so I don’t want anyone to take this advice the wrong way, but there is such a thing as bad debt. I’m going to go over how to stay away from the destructive kind of debt and punch holes in any false ideas you have about how debt impacts your business.

Avoid unnecessary “write offs”

Avoid the phrase, “I can write this off.” What’s better, getting 25% back of a dollar that you spent on a tax deductible expense or paying 25% tax on a dollar that you never spent in the first place? If you find yourself justifying a lot of your business budget with the phrase “I can write this off anyway,” your business might be unduly anemic on a day when business prospects aren’t so rosy.

Increase revenue

This might seem obvious, but sometimes it might seem like like a better option to go after a “sure thing” of debt financing than going after a deal that isn’t certain. Remember that every moment you spend at the bank is time you could be on the phone sourcing new deals or connecting with an existing customer. Getting more revenue in the door might start with something as simple as using invoicing software to automate your billing process.

Maintain a good relationship with creditors

If you have existing debt, the worst thing that you can do is cut off communication. If your creditor fears that you aren’t going to be good for 100% of the debt, they could increase the interest rate or fees associated with the debt.

In the worst case scenario, picking up the phone call when your creditors come calling goes a long way towards a debt-restructuring deal or waived late fees.

Debt consolidation makes sense in some cases

More often than not, debt consolidation is designed to make money for the debt consolidator and not to save you money. If your interest rate isn’t going to be significantly lower than it is now, you are probably better off just formalizing a debt snowball schedule if your goal is to accelerate the debt reduction.

But if you go into debt consolidation with eyes wide open, especially if you have long-term liabilities that originate from a time when interest rates were really high, it might make sense to look at consolidating everything into one payment.

Another scenario where you might want to think about debt consolidation is where cash flow issues are threatening the viability of the company and restructuring the debt to a longer period of time could help with regular slow periods.

On the other hand, setting cash aside for slow periods might be an equally good solution without having to pay costly origination fees.

Cut discretionary spending

The idea that you have to spend money to make money might be true if you are financing equipment or researching a new product line, but there are plenty of areas where more spending is just more cash out the door.

A famous example of cutting costs is when Mitt Romney took over the 2002 Winter Olympics. By taking measures such as cutting out fancy catered meals for pizza and paper plates, he took a bloated budget and turned it into a budget surplus.

About Jenny

Jenny is a content writer for ZipBooks and a graduate student at Brigham Young University.

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