Managing Business Credit Card and Vendor Debt During Tough Times
Running a business often requires relying on credit – whether it’s credit cards, lines of credit, or accounts with vendors. But when times get tough, that business debt can become hard to manage. Here are some strategies for maintaining your business credit and accounts during periods of financial hardship or debt relief efforts.
-Prioritize Essential Expenses
When cash flow gets tight, take a hard look at your business expenses and prioritize what’s essential versus discretionary. Keep paying for necessities like rent, utilities, payroll, insurance and inventory. Try to minimize or pause non-critical expenses like travel, bonuses, office perks, etc. This frees up cash to pay down debts and maintain good standing with your most vital vendors or creditors.
Talk to Your Lenders
Don’t wait until you miss payments to talk to your lenders – be proactive. Call credit card companies, banks and financing partners to explain the situation. See if they can offer hardship programs, reduced payments or lower interest rates. Lenders want to help valuable long-term customers, so ask about options. The earlier and more transparent you are, the better the outcome will likely be.
Consider Debt Consolidation
If you have multiple high-interest debts like credit cards or short-term loans, consider consolidating into a single lower rate loan to reduce the monthly burden. This can provide relief through one predictable payment versus juggling many. Be sure to shop rates and avoid options that charge hefty fees. Your bank may offer a business debt consolidation loan that makes sense.
Prioritize Vendor Relationships
Just like with lenders, communicate early with important vendors and suppliers if you foresee issues making payments. See if they can extend terms, offer discounts or pause services temporarily. Keeping vendors in the loop helps maintain goodwill and the ability to restart business with them down the road.
-Explore Debt Settlement
For unsecured debts like credit cards, debt settlement may be an option. This involves negotiating a lump-sum payoff for less than what you owe. While it can eliminate debt, it also comes with fees and risks like tax liabilities and credit damage. Be sure to understand the pros and cons of debt settlement before pursuing this route.
Consider Bankruptcy Protection
For severe cases, bankruptcy may provide the protection and clean slate needed for your business to recover. Chapter 7 liquidation or Chapter 11 reorganization can eliminate eligible debts while allowing you to continue operating. Be aware bankruptcy comes with major legal, tax and credit implications that need to be weighed carefully before filing. Consult qualified legal and financial advisors beforehand.
Shift Focus to Profits
Ultimately, the best way to manage debt is by having consistent profits and cash flow. During challenging times, you may need to make some hard business decisions to cut costs, increase efficiency and boost profitable activities. This can put your business on steadier ground to both service existing debts and have resources to invest for the future.
Maintain Personal Credit
As a small business owner, your personal finances are often linked to the company’s. Be cautious about personally guaranteeing business loans or using personal credit to fund operations. If possible, keep personal credit cards, mortgages, car loans, etc in good standing since poor personal credit scores can impact your business borrowing ability.
Watch for Warning Signs
Monitor your business finances closely for signs of growing credit risk or excessive debt burden. Warning flags include relying on credit for basic expenses, accumulating late fees, maxing out credit limits, seeing your business credit score drop, or creditors and vendors contacting you about past due payments. Address such issues immediately before they spiral.
-Make a Debt Management Plan
To strategically guide decisions, develop a written debt management plan with steps to pay down debts, build savings for emergencies, and monitor credit. This helps you thoughtfully navigate challenges versus reacting hastily in the moment. Set goals and timeframes to realistically improve your situation based on close study of the numbers and best options available.
Communicate with Partners
If you have business partners or investors, keep them in the loop about the debt situation and how you plan to handle it. Transparency helps retain trust and support. Partners may be able to provide additional capital, expertise or other assistance to help the business through the rough patch.
Know Your Rights and Responsibilities
Educate yourself on consumer rights regarding debt collection practices, credit reporting, bankruptcy, late fees and interest rates. Avoid shady companies making unrealistic promises of debt relief. Work in good faith with legitimate lenders and vendors to find ethical solutions. Honor your obligations to the extent reasonably possible or seek qualified legal advice about alternatives.
-Don’t Wait to Seek Help
You don’t have to navigate financial challenges alone. Consult experienced professionals like business attorneys, accountants, credit counselors or financial advisors for guidance on managing debt and improving your finances. Local SCORE mentors can also provide free business advice. The earlier you seek outside expertise, the more options will be available.
While dealing with business debt can be stressful, especially during economic downturns or industry shifts, taking a proactive approach and exploring all resources available can help you safeguard your company’s financial health for the long run. With prudent planning, transparency and appropriate professional help, you can develop smart strategies to maintain important credit relationships while getting back on the path to stability and growth.