Starting a business can be both exciting and overwhelming at the same time, especially when you consider the business debt you could accrue to get your idea off the ground. In most cases, business debt is an unavoidable circumstance. Talk to most successful business owners and they can tell you that using debt to grow business is usually the norm, as most people don't have enough starting capital to avoid taking on any debt.
Sometimes, however, you'll start spending money that you just can't seem to make back. This is when business debt stops being a factor of the business and starts becoming a problem.
Types of Debt
Even if you have money set aside for your new business venture, it's common to run into issues that result in business debt accumulation. Here are some of the types of business debt that can occur.
Debt from Startup Costs
In the beginning, you have a long list of expenses, but no income to cover the costs of your new business. If you don't have money in the bank to pay for the startup costs, then it might be necessary to take out a loan to cover them, a cruel cycle if you're unable to make this back within the first couple of years.
Investing in Growth and New Business
Even the most successful companies need to consider growth continually. If you're ready to take your business efforts to a higher level, then you need to be sure that you're prepared with funds available to support that growth. While some businesses are able to take on investors, many business owners must provide these funds themselves, considering it good business debt. However, this can quickly get out of hand, causing them to go deeper into debt as they take out further loans to support the business.
Debt Owed after Business Closes
There might come a time when the business needs to close because the company is no longer viable. Even if you decide to shut down the company, it doesn't wash away unpaid debt balances, and you yourself may be personally liable for business debt.
Slow Season Affecting Business
Most industries have a "slow season" during the year. The timing of cash flow varies depending upon when the products and services are in high demand. Depending upon how long this season is, and how long the good season is, you may have to take on debt to cover the costs of operating your business when it's slow.
Can You Be Personally Liable for Business Debt?
These business debts probably still need to be paid. If the business fails, then paying them falls to you, the owner. When this happens, you can find yourself going into debt for a business that no longer even brings in any type of revenue.
Business Debt Relief
A few lines of credit might seem insignificant compared to the potential earning power of your company. However, business debt can add up, especially when you start to get behind on payments. These business debt balances can increase due to interest accrual, late fees, and other charges related to unmet payment schedules.
Even one unpaid account can cause a balloon effect, making it harder to pay any of your balances down. If you feel like your debt payments are getting out of hand, then it's time to consider options for business debt relief.
Business Debt Consolidation
Business debt consolidation is the process of rolling all your balances into one simple payment. The debt consolidation company negotiates with the creditors to pay off the original balances. A business debt payment plan allows you to pay off the balance over time. This process is typically much cheaper in the end since you can reduce the interest rates and avoid late fees and overdrafts.
Business Hardship Loans
When a small business is struggling, you have the option to apply for a business hardship loan, also known as a business rescue loan. These loans are available through the Small Business Administration and can provide as much as $35,000 in the form of an interest-free loan to cover business debts and ongoing expenses. Repayment for a business hardship loan is usually deferred by a year, but eligibility varies depending upon the age and profitability of your company.
What Is a Hardship Payment Plan?
A hardship payment plan might be available through the creditor when an account has fallen behind. If you're trying to catch up on payments, then the lender might be willing to work with you directly to determine an optimal payment plan that fits your cash flow.
The key is to talk to your creditor about the situation to see if you can adjust the payment. The goal is to work out a more affordable monthly payment plan so you can stay current on the account.
Business Debt Restructuring
It's important to consider interest rates, fees, and payment requirements to determine if it's realistic for you to keep up with the necessary business debt payments. If you're overpaying on interest costs and falling behind on payments, then it likely means2.3% that the business could benefit from business debt restructuring. This process is effective in reducing the need to default on existing debt, and you can enjoy the benefits of lower interest rates.
The accumulation of business debt doesn't reflect the overall success of the company. Carrying debt is often a normal part of running a company. The key is to manage the debt strategically to avoid unnecessary expenses due to interest costs, late payments, and other factors. In addition, it's also important to recognize when a company is no longer viable, and when it may be time to start looking for business debt relief and pay off the debt you've already accumulated.