Many small business owners use business credit cards to help pay bills and finance their business growth, but sometimes business credit card debt can become a challenge during tough economic conditions. If your business is struggling with managing credit card debt, you may want to make some adjustments to your financial management and overall business operations to put your company on stronger footing for the recession and beyond.
There are a few key things to know about business credit card debt and how to manage your debt to keep your business in good financial condition.
Business Debt Is Common
If you are carrying a certain amount of business debt, you are not alone. Many business owners need to take out a loan or run up a balance on their credit cards in order to pay for one-time expenses, invest in future growth opportunities, deal with shortfalls in cash flow or cover receivables from slow-paying clients.
According to the 2020 Small Business Credit Survey from the Federal Reserve, 68 percent of small businesses have business debt of $100,000 or less, and only 29 percent have no outstanding debt.
Small business credit cards are one of the most frequently used types of debt financing for small businesses. The survey also found that 53 percent of small businesses used credit cards on a regular basis, almost as frequently as loans and lines of credit (54 percent of businesses used these regularly).
Don’t feel bad about having business debt. Borrowing to help your business grow and having access to a business credit card or line of credit to manage everyday ups and downs of cash flow is an essential part of being in business, managing your business finances and investing for the future. But if you are missing payments on your business debt, or if your debt levels are becoming unmanageable, it might be time to make some changes.
Most Business Credit Card Debt Is Personally Guaranteed
For many small business owners, getting a small business credit card is an important first step to building credit under their business’s name. But there is a catch: in order to qualify for that first business credit card, many banks require business owners to provide a personal guarantee or use their personal credit score to qualify for financing.
If this was the case for you, most credit card issuers will be allowed to pursue you to personally repay the debts of your business, even if you have the “corporate shield” of an LLC or other legal business entity protecting your personal assets from lawsuits against the business.
Having a personal guarantee for business debts, or using your personal credit score to qualify for financing, can be a helpful and necessary exception to the rule of keeping your business and personal finances separate. If you have good credit in your personal life, this can help you qualify for a credit card, loan or line of credit for your business. The Fed’s Small Business Credit Survey found that 88 percent of small businesses rely on an owner’s personal credit score to secure financing.
Just be aware that in case your business suffers a setback and you are unable to repay the business’s debts, you as the business owner may still be liable for those debts. You may need to be prepared to repay your business debts with your own money.
How to Get Out of Business Debt and Recession-Proof Your Finances
If you are struggling to manage your business debt, or even if your business is surviving for now, but you want a stronger foundation for your finances, here are a few steps that you can take starting today:
Reduce your business spending. How much are you spending per month on non-essential items for your business? Could you cut back on office space, change the way you buy inventory or otherwise reduce the footprint of your operations?
Improve your business profitability. Tough economic times are a chance to get aggressive with changing the way your business operates from a financial profitability standpoint. Can you get rid of some lower-performing product lines or unprofitable services? Can you raise your prices on certain product lines or offer a different package of services that could help your customers in a different way, while still making a healthy profit margin for your business?
Get paid faster. Ask your current customers for better payment terms. Are you waiting too long to get paid? If you’re waiting for 60-day terms on invoices, you might want to ask your customers for 30-day terms. Many customers will be willing to pay you more quickly, especially if you offer a slight discount or bonus for early payment. Getting paid faster can help improve your cash flow and boost your cash on hand, giving you better predictability and more cash for paying off debts.
Boost your cash reserves. Along with paying the minimum amounts on your business credit card, business line of credit or business loan, a recession might be a good occasion for boosting your cash reserves. Consider delaying big purchases or holding off on a big investment until you have a few more months’ worth of cash in the bank. If you are contributing to a SEP-IRA or other retirement savings plan, you might want to hold off on putting more money into retirement investments and put that money into your cash reserves until your business debts are at a more manageable level. Having more cash on hand can help you feel calmer and help you make better financial decisions during uncertain times.
How to Restructure or Cancel Your Business Credit Card Debt
What if just paying off the debt each month is not working for you, and you need a more aggressive strategy for getting rid of business credit card debt? There are a few options for how you can restructure, refinance, consolidate or otherwise renegotiate your business credit card debt:
Consolidate your business credit card debt. Some banks will let you consolidate your business credit card debt and other business debts into a small business debt consolidation loan. Getting a small business loan, especially if it’s an SBA (Small Business Administration) loan, can give you a longer payment term and a lower interest rate than a credit card. This will give you more time to pay off your debts at a manageable monthly payment. You typically need to have a good credit score to qualify for this type of loan, so it might not be an option for every business owner.
Refinance with a balance transfer. Another strategy is to refinance your debt by transferring your balance to a new card, especially if you can get a 0 percent introductory interest rate for the first 12–18 months. Doing a balance transfer can help you pay off your debt faster, especially if you have a plan in place for how much money you can put toward that debt each month. But beware: if you fail to pay off the debt on the balance transfer before the introductory APR period expires, you might suddenly have to pay a lot of additional interest.
Settle your debts. If you're having severe difficulty with paying your business debt, look into debt settlement. This is when you negotiate with lenders to pay less than you owe on the total amount of debt. You “settle” the debt by agreeing to pay a lump sum that is smaller than the amount that you borrowed, and the lenders agree to stop pursuing you for additional payments. Debt settlement can be risky, and it can hurt your credit score. Be aware of the possible risks and downsides of debt settlement programs, and watch out for debt settlement scams.
Declare bankruptcy. No business owner wants to declare bankruptcy, but depending on your overall financial situation, filing bankruptcy can be a viable last-resort option to clear your debts and rebuild for the future. You should consult with a bankruptcy attorney to understand your options before you file, and you might have to go through consumer credit counseling prior to declaring bankruptcy. Depending on your situation and what type of bankruptcy you choose to file, some of your business debts might have to be restructured or reorganized, and you might have to agree to repay some of your debts over time. Learn more about bankruptcy laws and the bankruptcy process at the U.S. Courts website.
Sometimes a recession is a good opportunity to change the way you do business and improve your business finances. Your customers may still want to spend money with you, but they may want to spend differently. Look for ways to unlock more spending from your customers, create more profitable customer relationships and let go of lower-performing customers or less profitable products.
But if your business is suffering, and your revenues are not bouncing back, it might be time to consider more extreme options. Even if your business is failing, there are still a variety of options like debt settlement or declaring bankruptcy to protect your rights and give you a fresh start for your financial future.
Ben Gran is a freelance writer from Des Moines, Iowa. Ben has written for Fortune 500 companies, the Governor of Iowa (who now serves as U.S. Secretary of Agriculture), the U.S. Secretary of the Navy, and many corporate clients. He writes about entrepreneurship, technology, food and other areas of great personal interest.