How to Get Your Business Out of Debt in 5 Steps

Debt is a necessary part of running a small business. A business loan, line of credit or a business credit card can help your company hire new employees, purchase equipment and finance growth. But too much debt can stifle cash flow and put your business at risk. And the less you owe, the more you have to reinvest.

The average U.S. small-business owner has $195,000 of debt, according to a 2016 study by Experian.

Here are five steps to digging your business out of debt.

1. Take inventory of your debt

Sort all of your debts by interest rate and monthly payment. This includes payments on business loans, lines of credit and business credit cards as well as outstanding payments due to vendors.

This process can help you prioritize which debts to tackle first. Some experts recommend starting with the highest-interest-rate debt.

New small-business owners should aim to have all of their debt repaid within their companies’ first 12 months to lower the risk of bankruptcy, says Winnie Sun, founding partner of Sun Group Wealth Partners in Irvine, California, which provides financial planning for businesses.

2. Boost sales

Once you have a debt management plan, you can think about ways to boost your sales. Here are a few ideas:

• Reward loyal customers. A loyalty program can increase customer satisfaction and retention: About 82% of people said they were more likely to shop at a store that offers a loyalty program, according to a 2014 study by Technology Advice, a tech services firm.

• Get active on social media. Sun advises engaging with customers on social media. Respond quickly to comments, ask for input, and pay attention to your company’s Yelp reviews: 84% of people trust online reviews as much as personal recommendations, according to a 2016 survey by marketing company BrightLocal.

• Consider raising prices. With the right strategy — such as offering a volume discount on large orders — you can do this without losing customers. Volume discounts can help your business stay competitive, according to the Harvard Business Review.

3. Cut costs

Ideally, boosting sales brings in enough revenue to tackle your debt. But if your expenses are running a bit too high, here are three ways to cut them:

• Sell off equipment, office supplies and other items that you don’t use often. Buy used equipment or lease if necessary.

• Downsize to a smaller office with lower rent and utility costs, consider a co-working space that doesn’t require a long-term lease, or relocate into a home office.

• Split costs with other companies. “Look for other people who are running similar businesses and consider sharing resources. Share employees, internet services,” Sun says.

4. Refinance high-cost debt

The Federal Reserve raised interest rates in March and has signaled two more rate hikes in 2017. These increase the cost of variable-rate debt, including credit card balances and lines of credit.

If you can’t afford to repay debts in full anytime soon, consider debt consolidation or refinancing, especially if you have strong credit.

With refinancing, you’d take out a lower-interest loan to repay the original loan. With consolidation, you’d combine several loans into one new loan.

“If you can change the loan from variable to fixed, and then pay it down quickly, then that would be ideal,” Sun says.

Business credit card debt can also be refinanced or consolidated via a balance transfer to a new card with a 0% interest promo period; watch out for fees and aim to pay it off in full before the 0% period is up.

All of these options let you lock in a lower, fixed interest rate and decrease your payments.

5. Shorten payment terms with clients

Maybe your business has clients on a long-term payment plan. Or perhaps they consistently pay late. In either case, it might be time to revise payment terms.

For example, give new clients 30-day — rather than 90-day — payment terms. Offering an early-payment discount or charging a late-payment penalty can also be effective strategies for collecting on unpaid invoices.