By Hannah Whittenly
A business owner choosing to borrow money may be a good idea if that entrepreneur believes that the return on the capital obtained will be much higher than the interest paid on the loan. However, that isn’t always the case. Sometimes businesses make poor investment choices with borrowed money and factors, such as the overall economy, may suddenly produce a slump in sales. The debt at that point may be overwhelming.
What a company does during such a financial crisis is pivotal. A business owner has to take charge and right the ship or bankruptcy and liquidation is the likely outcome. Here are a few strategies you can use to help your company weather the storm.
Audit Your Finances
First, to fix the problem, you must understand the issue as thoroughly as possible. Perform an audit of your accounting so that you have a better understanding of your outstanding debts, other expenses and your revenue. You must also make a calculation for how much money you need to keep operating. That will make it much clearer in regards to what you have to do to survive.
Start Slashing Expenses
Once you have a much better idea of how your books currently look and how much money you need to survive, you need to start slashing expenses to insure that you can remain in business. This will require some painful choices. If you have multiple locations, you may need to shut down the most unprofitable ones or combine them so that you’re not paying for more buildings than you need to have. You may also be forced to cull your workforce and keep just those employees who you deem to be the most valuable.
Renegotiate Your Debt and Contracts
The foremost concern of lenders is that they continue to get paid. If you go out of business, then that becomes more of a question mark since they’ll have to fight other creditors to get a hold of your assets in court. Many lenders may be willing to let you re-negotiate your debts by allowing you to pay a lower monthly payment for an extended period of time. Contracts with vendors can also be renegotiated. If such options are available to you and you are in need to do so, then do it. If your creditors won’t negotiate, then make sure that you meet with an experienced business debt collection lawyer or wherever you are to examine your options.
Increase Your Cash Flow
In such a financial crisis, finding ways to increase your cash flow both short-term and long-term is paramount. Examine your receivable accounts. Make sure that invoices are sent out immediately and consider reducing payment terms. If things get too hairy, then consider liquidating some of your inventory to get the money you need. Overall, look for any possible way that you can obtain more revenue.
Learn the Consequences of Going into Debt
Last, but certainly not least, you need to avoid the borrowing behaviors that lead to your financial crisis in the first place. A business should be self-sustainable. It should not have to rely on funds obtained from loans, credit or other forms of borrowing. According to statistics, bankruptcies for businesses are on the rise. Be careful with how you borrow and spend money so that don’t end up as one of those statistics.
A debt-based financial crisis can certainly be stressful for the business owner. However, if you take the right steps, you will survive. Assess your finances and make changes by lowering costs, increasing cash flow and re-negotiating loans and contracts. Also avoid the poor borrowing habits that lead to your problems in the first place.
Hannah Whittenly is a freelance writer from Sacramento, CA. Most of the time she loves to write about business and family. She regularly interviews small business owners from around the world about their business practices, products, and services.