Loans for business, small business credit lines and increased credit card debt is a fact of life in today’s economy if you’re an entrepreneur. Becoming debt free is highly desirable and a significant accomplishment. A debt-free lifestyle is a ticket to personal freedom. For small business owners, debt freedom often provides an opportunity to take risks, expand personally and professionally. Debt relief also affords many entrepreneurs the ability to relax after undergoing long periods of financial hardship and stress. With enough money to cover the bills, a business owner can sharpen his/her focus, and optimize business processes. It’s important in business to stay focused on growth and progress – for both owners and employees alike.

You may not know how to get your focus back if you’ve been struggling for a long time.

Debt Free Step 1: Shut Off the Small Business Debt Valve

An old adage says that “it takes money to make money” – and in business, a healthy cash-flow is king. According to Industry Canada’s Key Small Business Statistics, many small businesses will not make it to their 5th anniversary. Often these businesses fail because of cash-flow issues. Goods-producing businesses have a survival rate of 66.8 percent after 5 years and service-based businesses even less, only 63.3 percent. While cash flow problems exist and the debt valve is open – interest continues to grow. The problem worsens and it can be challenging to stop the flow of new debt.

Your first step to debt freedom should always be to stop using credit to manage your cash flow problems – and stop creating additional small business debt. By pro-actively tackling your cash-flow problem, you can clear up your debt and make better financial decisions for your business. If you receive credit card offers in the mail, toss them away and look for a better solution.

While you are exploring debt solutions, review the financial planning tools, data, and financial systems your business has been using. Ask yourself the following questions to see if your debt-free goals align with your current business reality:

• Are the numbers in your reports accurate and consistent with the results you are seeing in sales/production?
• Are you using budgets? If yes, are your budgets realistic? How do you know?
• Are you setting aside money to pay yourself, suppliers, the government and your insurance company?
• Do you have reasonable targets for production and sales? What data are you relying on to back that up?

If your bookkeeping tells you that you should be making a profit, but you keep sinking further into debt, it may be time to hire a professional who can help get you on track. You can build a more sustainable business future.

Debt Free Step 2: Refinancing & Debt Restructuring

The second step to a debt-free business, is to make a list of all of your outstanding debt. List everything (both secured and unsecured debts) in order of the highest interest rate to the lowest interest rate. Who do you owe the highest balance? If the highest interest rate you pay matches the highest debt you owe, it’s time to consolidate or begin a structured interest reduction plan. You may want to consider moving high balance, high interest accounts to credit facilities with lower interest rates. If you don’t have any available credit left (your operating line/bank line of credit or corporate cards are “maxed out”), shuffling balances and payments around isn’t going to help. You may require a structured approach to reducing your debt.

A Licensed Insolvency Trustee (LIT) is a debt restructuring specialist who can help you create a customized small business debt solution. Spergel LITs have strategic business solutions that can help you negotiate with your creditors – this includes Canada Revenue Agency (CRA). An LIT will also provide support to help you manage your business after your debt is under control.

If you don’t have a lot of credit, and you’ve never asked your bank for a business loan before, you may want to explore a consolidation loan. Ask your bank about the benefits of lines of credit vs operating lines. Find out if you can get a fixed term loan to purchase new equipment (as long as your purchase will increase revenue and help you reduce debt with an improved cash flow position). While initially exploring your options, you can inquire about government programs that help business owners offset costs to make paying down debt easier. It’s worth it to speak to a professional about refinancing and consolidating high interest debt into a single, more manageable small business loan. Business loan refinancing can lower your APR and reduce the frequency of your required payments. With the right payment structure, payment planning gets much easier and may even free up additional working capital for your business.

Debt Free Step 3: Create a Repayment Plan

Whether you hire a financial advisor or not, you need a realistic, goal-oriented plan to ensure your new structures and refinancing strategies are actually put to good use. For your repayment plan to work, it needs to be realistic and achievable. Put your business to the cash-flow test. Create a budget that includes realistic target for sales, accurate cost estimates and paying yourself as well as the government. If an aggressive repayment plan neglects other aspects of your business finances, it will be less likely to succeed. Start with targets that make sense and build your repayment plan around these metrics. Your plan should be goal-oriented with targets and time-oriented milestones to meet.

As your company works towards debt freedom, your creditors will learn to trust you more. Strengthening your relationships with lenders can be very valuable to your business in the future.

Debt Free Step 4: Stick to Your Repayment Plan

As many times as it takes to get it right, cycle through steps 1-4 and continually re-evaluate your plan. Your small business debt management skills will improve as you continue to familiarize yourself with the financial mechanics operating “under the hood” of your money-making vehicle. Continue to work on your financial decision-making skills, seek guidance from seasoned professionals and create realistic plans for growth and progress. With a little effort, you can transform your relationship with debt and sustain a profitable business model that celebrates debt freedom.

As your small business recovers from debt and continues to grow, you will continue to make new business decisions. Some of these decisions will work really well, increasing profit margins and realizing the vision you have for your company. However, all great ventures include many risks and there may be times when you feel like you’re getting in over your head again. If you ever do feel like your business is in trouble, don’t worry – it will be ok – you’ve always got Spergel!

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