Every retail operation incurs debt. It’s a normal part of doing business. However, managing that debt and keeping it from becoming a serious strain on your business requires effort and skill. If you are a business owner, that effort begins by taking full responsibility for managing your business debt. Neither your broker nor your accountant can do it for you. And failing to act quickly can lead your enterprise to financial oblivion down the road.
GET CLEAR ABOUT YOUR DEBT
In debt management, as in life, knowledge is power. Checking exactly what your debt load is on a regular basis provides the foundation for taking control of those debts. Whether the news is good or bad, you need to know where you stand and what direction you are moving in. An old retail slogan cautions, “You can’t manage it if you can’t count it.” Nowhere is that more pertinent than in debt management. Being clear about your finances is step one.
The job of calculating the debts and liabilities that must be charged against your business assets may not be fun, and it involves a bit of work, but it provides an essential dose of reality. Here is a reminder of some of the liabilities that your business may have:
Credit Card Debt: Almost everybody uses credit cards, so your Visa or Mastercard balance is nearly guaranteed to be part of the total debt obligations of your business.
Other Charge Accounts: If you have any charge accounts with vendors, suppliers or other businesses, these balances must be included as part of your total liabilities.
Payroll Obligations: Unpaid wages, if any, are a part of your total debt load.
Outstanding Loans: Until you list them on paper or in your computer, you may not realize how fast they add up. In this category are auto loans, business renovation or expansion loans and inventory purchases on credit.
Outstanding Bills: Don’t forget those outstanding bills sitting in a drawer. This category includes unpaid workers' compensation insurance, rent, business insurance, life insurance, medical insurance, auto insurance and utility bills.
Unpaid Taxes: Among the easiest to forget when calculating total debts and liabilities are unpaid taxes. Depending on where you live, this includes not only federal and state income tax bills or estimates due but also state real estate and personal property taxes as well as city, county and other local taxes. Never forget that unpaid taxes run the risk of government intervention. Governments have the authority to seize your assets–including bank accounts and even personal assets such as your house or your car.
Mortgage: If you have purchased a building for your business, there is that debt to consider. Even though a mortgage is secured with the value of the building, it is still a debt and requires monthly servicing. Keep an accurate account of how much has been paid off, what’s owed and how much equity you have in your building at all times.
TRACKING YOUR DEBT
You have to total up all of these and any other debts to provide an exact picture of your debt load. Good accounting software is vital. Without it, or a computerized spreadsheet, the job of keeping track of your debts regularly may take more time than you’re willing to spend.
Checking exactly what your debt load is on a regular basis provides the foundation for taking control of those debts.
Once you have added up all of your outstanding debts and the status of each one, you’ll know 1) whether your debts are under careful control or 2) whether you have a debt load that is spiraling out of control to the point of endangering the future of your business. If you find your business to be much deeper in debt than you imagined, there is no need for alarm–just understand that there are steps you must take to get that debt load back under control.
If your debts are growing, resulting in overdue payments, it’s time to take immediate action. Keep in mind that with a sole proprietor or partnership, you could be held personally liable for business debts–meaning that creditors could seize your assets. This is one reason for forming a corporation, which offers some protection against this possibility.
Obviously, the sensible way to avoid the catastrophic effects of overspending your limits is to start with strict personal discipline in the use of credit and credit cards. By never spending more than you can pay off when the bill arrives, you’ll separate yourself from the crowd. Of course, there may be times when circumstances call for making a large expenditure for a critical business need. In such a case, carrying a debt for a specific time is quite acceptable, provided your overall debt load is under control and you have a specific plan for paying it off. However, if you have a history of debt problems, you may want to reconsider your plan.
THE KEYS TO FINANCIAL SUCCESS
Failure to keep payments up to date on all debts can result in irreparable damage to your business. Even one court action by a creditor can result in unrest among your employees, and limitations on your credit from suppliers.
Debt management is not a passive responsibility. It requires consistent attention and action on your part. Whether your debt load is heavier than you’d like or within reasonable limits, these tips will help you to take and remain in control of your spending.
Business vs. Personal Finance: While there may be times when it seems convenient to handle a business transaction with personal money, or vice versa, this is a serious mistake. It not only creates problems keeping finances separate but also makes both your accountant and the IRS very unhappy. Don’t do it.
Credit Card Debt: Arguably, there is no more dramatic illustration of the destructive potential of unmanaged debt than today’s use of credit cards. “Just charge it” is the anthem of credit card issuers, who are happy to lend their money knowing full well that a large percentage of buyers will be drawn into their highly profitable “minimum amount due” trap.
Any business owner carrying a large balance on a credit card has almost certainly been lured into the ploy. By overspending and paying only the minimum amount due each month, these unfortunate victims take on the burden of an average interest rate that runs in the mid-to-high teens or higher at any given time.
That combination of a high balance and high interest rates can produce a perfect storm of unmanageable debt that is extremely difficult to escape.
The obvious lesson: The only rational way to use credit cards is to spend no more than what you can pay off in full every month.
For many people, that advice comes too late. Once you’re saddled with credit card and other types of debt, strong debt management medicine is the only cure. Stop further credit card purchases–and cut out unnecessary spending entirely. Pay down the balances on credit cards that charge the highest interest rates first while paying at least the minimum due on all your other debt. Once you’ve paid off your highest interest debt, pay down the next highest and so on.
Other Debts: Don’t borrow money against your home or your 401(k) to pay off business debts. What may seem like an easy solution could cause you to lose your home or your business, or undermine your retirement plans.
Beware of Debt Consolidation: Avoid the temptation of companies that offer to “consolidate” your debts into one easy-to-pay-off loan. In many cases, this will do nothing more than add another layer of debt. While there are reputable nonprofit debt counseling agencies that may be able to consolidate debt and assist in better managing finances, there are also many disreputable agencies that are best avoided. Research carefully before taking this course for managing your debt.
Avoid Taking on New Debt: Unless your debt load is manageable and under control, abstain from taking on new debt unless absolutely necessary.
Talk With Creditors: If you are behind on any payments, contact the creditor and make it clear that you are working to catch up. Most creditors will be lenient with debtors who keep in touch and show evidence of making sincere efforts to pay off their debts. See if you can arrange terms that you can manage–perhaps smaller payments spread out over a longer period. Some creditors are open to the possibility of negotiating to lower interest rates. In the case of a heavy debt load, that’s always worth a try.
Avoid Aged Payables of 60 Days or More: Payables of 60 days or more will almost certainly lower your FICO credit score, which in turn will limit your ability to borrow money and prevent you from getting the best terms from suppliers and vendors. Make every possible effort to pay all bills within 60 days of receiving them.
Prioritize Debts: Rank your debts in the order that you want to pay them off. If credit card debt is part of your debt load, paying it off first (starting with those with the highest interest rates) will usually be your best move. Credit cards often have the highest interest rates of all debts, so carrying a balance can be very costly.
BEST TOOLS FOR DEBT MANAGEMENT
Obviously, the best way of all for managing debt is a conservative and disciplined approach to credit before it becomes unmanageable. These tips will help to achieve that goal:
- Start with a system designed to keep track of how much you owe at any given time and to whom.
- Never fall into the trap of paying bills late–that is often the beginning of a downward spiral.
- Some bills, credit cards for example, provide a “minimum payment” due. Paying only the minimum payment on such bills exposes you to the often- oppressive interest rates charged by such creditors. Even worse is paying less than the minimum payment. This can be a financially catastrophic failure.
- If possible, create an emergency fund to fall back on in the case of an unexpected bill.
- Create a computerized monthly bill calendar with reminders of due dates for regular bills.
- Sometimes, debt loads seem to take on a life of their own. If, despite your best efforts, you find yourself in need of help, consider visiting the National Foundation for Credit Counseling at nfcc.org for in-depth, personalized financial counseling and education.