A Battle Plan for Shrinking Your Small-Business Debt
By Carol Tice Edited by Dan Bova
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As sales dropped, many small businesses piled up debt over the past two years. Many businesses were kept on life support using charge cards--creditcards.com reports they're now the most common form of business debt, with 44 percent of owners using them in the past year--up from 16 percent in 1993.
I spoke recently with business-tax expert Linda Keith about concrete steps small businesses can take in 2010 to reduce their debt. Her advice:
1. Check your credit rating. Get your business credit report from Cortera, Dun & Bradstreet or Experian. Not all lenders promptly report credit changes, so you may want to prioritize debts that show up on the report over debts that aren't listed.
2. Read your covenants. These rules spell out the terms of your loan--for instance, if your business savings account at the bank dips below a certain level, the bank may have the right to call your loan. If you have loans with restrictive covenants you're in danger of violating, make sure you keep those loans current to maintain your credit rating.
When you violate your loan covenants, understand that the bank has to re-rate your loan, likely downgrading it. This means they'll have to put aside more money to cover your possible default. In other words, you are becoming a problem and damaging your banking relationship.
"It starts having a negative effect on the bank," Keith says.
3. Don't ignore the problem. If you contact lenders promptly and tell an honest story about the efforts you're making to keep your business afloat, they'll be more willing to help you. Keith recommends contacting lenders as early as possible, as soon as you know you're in trouble.
"If you're already at a point where you can't make an interest-only payment," she says, "you've run through some of the alternatives."
4. Hoard any extra cash. With the economy turning, some business owners may see sales rise this year. If that happens to your business, Keith says, start a separate account earmarked for emergency debt payments. Don't pay extra principal right away, as lenders are still capping credit limits and you could get caught without access to money you need.
"It's a mistake to assume any credit line you have will continue to have the same limit," she says.
Once you feel confident sales will keep growing, use your extra cash to pay down debt. Include paying down debt on your list of top priorities for your company once sales improve--it's easy to go straight to dealing with pent-up demand for marketing spending or needed new equipment and forget to tackle the debt first.
5. Make an offer. Keith says lenders are unusually open to working out a deal with small businesses now. They have too many bad loans on their books and need to get some of them resolved.
"Lenders want to work with you," she says. "They don't want your collateral. They want this to work."
It's unclear how long the current willing attitude at many banks toward settlement offers will last. If you're thinking about trying for a settlement offer with your bank, don't delay.
Will 2010 be the year your business gets out of debt? What would it take to improve your debt picture--a consolidation loan? Higher sales? Leave a comment and tell us what you think would most help small businesses in debt.
