Tips for avoiding and getting out of debt

Tips for avoiding and getting out of debt
By Michael Sanibel

The Importance of Planning
Borrowing money to start and expand your small business is often necessary and good business as well. It provides leverage and resources to purchase equipment and other essentials that you can’t pay for out of your own pocket. Most banks require a business plan before they will approve a loan because they want to know how you will pay them back. More importantly, you need to know if you can afford the loan to begin with.

To figure this out, you need a budget and sales forecast []. These tools provide the basic information needed to manage your business and determine how much outside financing you may need. They also provide a window into what sales levels and growth rates will be required to pay back your loan.

Avoiding Debt
The importance of good financial planning can’t be overstated. In the world of finance, the best defense is a good offense. Don’t get yourself in hot water to begin with by overextending yourself with debt. While some level of debt may be needed to get your business started, have a long-term plan in place that pays down that debt.

If you are financing your business with credit cards, you are paying an exorbitant interest rate and may be digging yourself into deep trouble. Avoid the path of least resistance by getting a small business loan or funding your growth organically through increased sales and profits. Limit the amount of outside financing to what you really need. That’s where the plan comes into play, and is especially important during periods of economic uncertainty.

The key is a disciplined approach to budgeting and controlling your expenses, and this means looking at them every month. If things aren’t working out the way you expected, review your plan and come up with corrective actions. Waiting will only make things worse in the long run.

Possible Actions
If you are having problems paying your bills, be proactive. Some of the suggested actions seem obvious, but a checklist is a helpful reminder:

  • Avoid taking on any new debt
  • Consider credit counseling
  • If possible, renegotiate your existing loan(s) to spread out the payments and lower the interest rate
  • Get a debt consolidation loan
  • Consider debt settlement
  • Cut expenses to the extent possible
  • Investigate ways to increases sales revenue
Debt Consolidation and Settlement
Debt consolidation is a viable option if you have multiple loans or credit cards, and you are having trouble making the monthly payments. The objective is to reduce those payments to a single payment on one new loan, thereby simplifying your life and reducing the overall cost at the same time. The new loan is structured to pay off the existing debts with an extended payment schedule and lower interest rate. While this doesn’t reduce your principal, the reduction in interest costs can be significant, especially if you are financing your business with credit cards. A longer payment schedule will also lower your monthly payments.

Debt settlement is a way to reduce your overall debt, including the principal owed. Generally, only unsecured debt such as credit cards and signature loans are candidates for this option. Loans secured by collateral are not typically good candidates because the lender has the option of seizing the collateral if you fail to pay. You also need to have enough cash on hand to pay the reduced principal in full since most lenders only agree to settlement if they can get the bad debt off their books, without waiting months or years.

A good settlement should result in a sizable reduction of the amount you owe. It also avoids the need to pledge any of your assets as collateral for a new loan to pay off your existing debt. If you don’t have the expertise or knowledge to deal with this, it may be worth the expense to consult an attorney or accountant. Forgiven debt is reported as income to the IRS so there may be tax consequences.

Debt Negotiation Strategy
Before attempting to renegotiate your debt, figure out what you can afford. Most settlements will require a lump sum payment, and that’s obviously not easy to come up with if you’re struggling. As a target, you should be able to settle somewhere between one-third and two-thirds of what you owe. Start out by offering less to give yourself some maneuvering room. Remember that if you default, unsecured creditors usually get nothing. They are motivated to extract something from you even if it’s far less than what they want.

If you are being chased by a debt collector, you can assume that the collection agency bought the debt from your creditor at far less than what you owe. Use that leverage to your advantage in negotiating a settlement. This provides a quick resolution to your debt problem and is something you should be able to do on your own. If a settlement is reached, make sure that the agreement is committed to writing and that the unpaid portion of the debt is permanently canceled.

Increasing Revenues and Decreasing Expenses
While it may seem contradictory, sometimes more spending may help you pay down your debt. For example, if additional marketing would increase your sales and profits, it may be to your benefit to launch a targeted advertising campaign. This approach is not advisable unless there is a reasonable probability that the payoff will substantially exceed the cost. Otherwise, you may be digging yourself into an even deeper hole.

If you are renting space and it’s more than you need for the near-future, it may be worth the cost of moving to reduce your rent. Sometimes it’s worth the short-term expense to reduce the long-term cost. Also take a close look at your utilities and all your monthly bills to see if you can cut back anywhere. When you buy supplies, buy in larger quantities to reduce unit costs. Look for new vendors offering better deals and don’t be afraid to negotiate with them.

If you are having financial problems, don’t panic and do something you may later regret. Many lenders will attempt to find a resolution that’s mutually acceptable since it does them no good to force you into total default or possible bankruptcy. Be upfront with your creditors and try to work the problems early. You don’t want to end up in a situation where bankruptcy is your only way out since it will severely damage your credit rating for ten years.

Michael Sanibel ( is a freelance writer specializing in business, marketing, personal finance, law, science, aviation, sports, entertainment, travel, and political analysis. He graduated from the United States Air Force Academy and is also licensed to practice law in California and New Hampshire.