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Attacking Business Debt

It's natural to feel a certain measure of despair when your business goes into debt, but if you use it as an opportunity to reevaluate your core assumptions and strategies, then this can also be time to initiate necessary changes and make your business stronger.

Not sure where to begin? Consider some of the following recommendations.

Take your business plan out of mothballs

Intractable debt could be the result of a problematic business plan — one that was either too ambitious, no longer applies, or that simply needs to be adjusted at the edges.

"This is the number one issue for small businesses," says Jim Harris, President of Seneca Financial Group, an investment bank that helps small, distressed companies with financial restructuring. Harris' first piece of advice to debt–riddled businesses is "to take a very hard look at your business plan and develop a set of realistic expectations for the coming twelve months."

Businesses in distress should consider the Small Business Administration as a refinancing source.

Identify superfluous assets

Make a list of your every business asset, including office equipment and supplies. "If you can't quickly describe what the value of a particular asset is — today — get rid of it," advises Harris. While this may sound drastic, selling off assets is a great way to increase immediate access to cash.

Of course, this doesn't mean that you should discard equipment that you can't sell. If you have an old computer, for instance, it will be of more value on a desktop than in a dumpster. The point is to find expendable assets that can improve your cash flow.

Don't hold onto inventory out of stubbornness

While enumerating needless assets, you may find you're reluctant to sell inventory. Since you'll likely get less for inventory than what you paid for it, this is understandable.

Nevertheless, Jim Harris urges businesses to "get rid of it and turn it into cash." At least, he explains, "that cash can be used to pay down debt which is probably accruing interest at a much higher rate than you're ever going to get out of inventory."

Naturally, the size of the loss you can absorb depends on how bad your debt is. If you're going to take a very big hit by selling your inventory, weigh that loss against the cost of the interest on your debt.

Evaluate equipment

If, in the process of taking stock of your assets, you decide to keep a piece of equipment, make sure it's in good condition. This way, says Barbara Weltman, author of J.K. Lasser's New Rules for Small Business Taxes, you won't court further debt if you need to replace equipment that's vital to your business.

Ultimately, prolonging the life of your office equipment is a good business practice that can help you stave of debt in the future. For instance, you can upgrade your computer's memory instead of buying a new machine.

If looking to refinance, first check your credit report

Whenever you apply for a loan, your credit report is evaluated and scored by the loan provider. If your creditworthiness is determined to be low, you're in for an uphill battle so check your credit history.

An important part of conquering debt is getting a very clear idea of your cash inflows and obligations.


Businesses in distress should consider the Small Business Administration (or their Small Business Investment Companies Program) as a refinancing source. According to Jim Harris, their loan rates will very likely be more favorable than what you'll find at a bank.

In addition to the 7(a) program, be sure to investigate the SBA's STAR program. STAR, an acronym for Supplemental Terrorist Activity Relief, offers reduced 7(a) rates to small businesses that have been affected — both directly and indirectly — by the September 11 attacks.

As a general rule, however, Jim Harris reminds businesses to borrow money to grow their business, not to pay off debt.

Master your cash flow

An important part of conquering debt is getting a very clear idea of your cash inflows and obligations. Simply put, says Jim Harris, if your sources of cash are less than your expenses, you need to cut your expenses back or talk to your creditors about working out an installment plan.

Don't forget working capital

If you work out a repayment plan with your lenders, don't forget to factor in your business' need for working capital. The sooner you bring this up with your lenders, the better.

Treat trade suppliers well

For Jim Harris, this means not financing your business by inordinately delaying payment to suppliers. This is a risky financing method. If you abuse the relationship with your trade suppliers, they may stop doing business with you.

What to consider if you work with a bank on your debts

If you decide to extend an existing loan with a bank, think twice before signing on for increased collateralization, Jim Harris cautions. Securing a loan with this kind of personal guarantee obviously has its risks. Even so, many small businesses are surprised to discover that their personal assets will actually be put on the chopping block if things go badly. In other words, do a gut check and ask yourself just how much faith you have in your business plan.

Another path you can take with your bank lender is to perform a liquidation analysis. A liquidation analysis will indicate how much money your business will need in order to stay open. It also will demonstrate to the bank that your business is worth more open than closed. Once you've made your case, you should then be ready to propose a payment plan.

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