Posted by Nate
Posted on 05-27-2008 under Business Operations

When starting or running a business, mounds of debt will invariably start to pile up. This can be from a business loan taken out, credit card bills, or some other form of financing needed to run your business. And if you’re anything like me, having debt hang over your head like a razor sharp scythe is not the most comfortable situation to be in. While large amounts of debt can seem daunting at first, there are some simple, even basic, steps you can take to not only reduce your debt, but also reduce your debt related stress.

First of all, make sure you are fully aware of exactly how much debt you’ve incurred or are likely to incur in the near future. Credit card bills and regular expenses add up quickly, so make sure you’re aware of what they add up to.

Once you have that ominous number in mind, figure out the best way to consolidate those debts. For businesses, take out a business line of credit so you’re able to put all your debt eggs in one contained debt basket. Or pick some other analogy for which to describe having one central loan for the bulk of your debt.

Once you do that, go ahead and shed some tears knowing that amount is much larger than you intended and then make a POA (Plan of Action) to chop that number down. The best way to do this is consistency. Much like a 5-year car loan, the best way to reduce the debt that you’ve already incurred is to allocate a reasonable amount of money each month towards the loan, not just the minimum owed.

Paying off the minimum due each month won’t get you anywhere. Those monthly minimums are designed so that the lenders can lull you into dragging out the life of loan that much longer. Meanwhile, interest continues to compound on your expanding balance. Thus, lenders profit massively off your unwillingness to actively reduce your debt.

On those occasions that you have a tidy sum coming your way, expected or not, take the opportunity to devote that much more into reducing your loan balance. You may be tempted to use that money for superfluous things like an office flat screen TV or an elaborate office party, but stand firm. Those things can come after your debt is under control and your profit margins extend beyond that of a ‘good week’.

In addition to consistent monthly payments and extra payments when possible, keep track of your spending. Are you adding to your debt? If so, plan to add more to your monthly payment. Beyond just looking at your statement, write down your total monthly expenses and see if there are ways to add money to your debt reduction. Chart your total cash flow per month to see where all your income is coming from and going to. Being fully aware of your financial picture will enable to you more effectively take control of your debt.

Taking control of your business spending and being responsible with your profits will go a long way to reducing your debt and providing greater security for economic downturns or other unexpected contingencies. It sounds easy and obvious, but you’d be amazed at how many businesses go under because they lack the most basic financial understandings and the commitment to operate within their means.