It is safe to assume most people hope their businesses will be profitable. Owners often hope to become wealthy because of their vision and work. That, however, does not always happen. The reality is that not all companies are successful. Starting an enterprise can drag business owners deep into debt. It's common for businesses to go into some kind of debt when they first begin. Taking on debt is necessary to pay for daily operations or even expand a business. However, problems arise when too much debt is racked up. Half of small businesses fail within the first five years because of issues like poor credit and exceeding debt, according to the U.S. Small Business Administration. If a business owner borrows too much and doesn't make enough to pay it back, it's easy for them to get in over their heads.
Challenges Paying Back Business Debt
A 2012 Gallup Poll found that nearly half of U.S. small-business owners have varying degrees of difficulty reducing their current business debt.
- 10 percent of small-business owners found paying back debt to be extremely difficult.
- 19 percent found paying back debts very difficult.
- 29 percent say paying off their debts was somewhat difficult.
It is important to note that 31 percent of those surveyed didn't find it difficult at all.
Shocking Reality of Reducing Debt
The most shocking reality of having business-related debt may be the measures that have to be taken in order to reduce it during bad times.
- Pay Out of Pocket: Saving the business could start by business owners reaching into their own pockets to reduce the debt. The hope is that it's a small sacrifice to make in the short-term and hoping for a payoff in the future.
- Cut Costs: If paying it off isn't an option, owners may have to find others ways to cut costs. These are often difficult choices like downsizing the business by selling equipment or eliminating parts of their work force. Another option for cost cutting may be as simple as contacting suppliers and asking for discounts or deferred payments from them.
- Call Lenders: Business owners should call lenders and let them know times are tight. The earlier the call, the more willing the banks may be to work out a deal. Creditors may lower interest rates or restructure payment options.
- Consolidate Loans: Putting all of your business loans into one payment may make monthly costs cheaper and help build credit. It can also make paying debts less complicated because lenders may offer a lower interest rate and possibly provide only one creditor to deal with.
Failure Is a Bittersweet Option
If a business fails and shuts its doors, just know that there may be repercussions from walking away. Often creditors will sue to recoup their money by going after the business owner's personal assets. There are measures to take to mitigate an already tough circumstance.
- Selling The Business: Troubled business owners can consider finding a buyer who will bail them out. Hopefully enough is made off of the sale to pay off lenders and erase any future ties with the business.
- Liquidating Assets: Liquidating the business often gives owners some cash and an opportunity to negotiate with creditors to settle their debts.
- Bankruptcy: According to United States court records, more than 25,000 businesses filed Chapter 7 bankruptcy between March 2012 and March 2013. It should be a last resort. Chapter 7 Bankruptcy allows business owners to give their company over to a bankruptcy trustee who will sell any remaining assets, collect any outstanding accounts receivable, pay owed taxes and try to pay back any owed money to creditors. This will have a negative impact on an owner's personal credit rating.
The risks are there, but going into business debt does not have to be a doomsday scenario. The good news is that business owners can come out on the other side of their debt issues. One in three business owners surveyed in that Gallup Poll say they have less debt now than a year ago.
Author Bio: Julian Hills is a content writer and blogger for Debt.org. His journalism career has taken him from newspapers to local television news stations and even a 24-hour cable network in the Southeast.