What are the best ways to reduce business debt? Our guide outlines the main strategies to do this, and what you should consider for each of them.
Debt is an issue that every entrepreneur faces in business in one way or another. In order to make investments, loans may have to be taken out or other liabilities entered into. If these liabilities grow beyond the solvency of the company or if the solvency of the company falls, for example due to the poor economic situation, there is a risk of insolvency, and you must then look at ways to reduce business debt.
Debt must be reduced early
Basically, it is clear: You should reduce business debt as soon as possible, because the amount of debt continues to grow through interest and reminder fees. But how do you best approach this? Basically, it always comes down to a problem with debt: the company’s expenditure is greater than the income. It is therefore necessary to change this fact.
Ways to reduce business debt
First of all, it is necessary to get an overview of the financial status quo. You should list all incoming and outgoing payments in detail. In addition to regular payments such as rent, electricity or telecommunications, think about payments that are not regular or fluctuate in amount. Smaller items in particular can play a role in the quantity and should not be overlooked. These payments, in particular, are often carried out spontaneously and thoughtlessly at company level and can add up to a relevant sum.
With this lineup, you should be able to understand in detail where your money ended up. Check each expenditure item for its imperative and identify points where you may be able to reduce expenditure. If you are unable to write in the black again on your own or if the situation is already serious, consider debt counseling.
Trade your way out of debt
If you make even a slight profit, depending on the amount of your debts, you can repay them yourself. If there is a small monthly loss, you may be able to reduce your expenses or generate additional income. Even then, it is basically possible to get out of debt alone. However, you should at the earliest opportunity have discussions with your credits to let them know you intend to trade your way ot of debt. They may be willing to offer you more lenient payment schedules for the money you owe them. After all, ultimtely, they would prefer that you pay the money and continue doing business with them in the future!
Examination of existing contracts
The conditions of many supply contracts, such as electricity or internet, are regularly undercut by offers and promotions. Depending on the industry, this may apply to further agreements. It is worth checking at regular intervals to what extent the existing contracts are still current. In this context, it should of course also be considered whether the contracts are still generally needed. Remember: Your provider is legally obliged to assist you when changing your contract. So don’t be afraid of the effort involved.
Debt settlement plan
A debt settlement plan will help you get an overview of your creditors and their claims. It is mainly used when you want to reach an out-of-court settlement with your creditors. The purpose of this plan is to work out what percentage of the receivables can be repaid by a certain point in time. It is important that the plan is more advantageous to creditors than bankruptcy.
It may be advisable to hire a debt counselor or lawyer to determine the settlement rate that can be offered to creditors. The comparison rate is determined by summing up all debts, interest and dunning fees. Based on this amount, it is considered how much of this amount can be paid off immediately. This amount is called the comparison amount. The comparison rate is determined from the percentage of the comparison amount in the total debt multiplied by 100.
Comparison rate = (comparison amount / total debt) * 100
Each of your creditors now receives back a portion of their claims, which is determined by the comparison rate. An example: You have outstanding claims amounting to $200,000. You can pay $50,000 immediately. Using the above formula, this results in a comparison rate of 25%. If a creditor has a claim of $4,000 with you, he receives 25% of it, i.e. $1,000.
Statistics show that creditors tend to adopt a debt settlement plan if it provides for more than 50% of the debt to be repaid. Even better odds may be possible. However, the plan should also not be too ambitious, because if even one creditor rejects the debt settlement plan, the entire extrajudicial debt settlement fails. This is because all creditors must agree to this.
Once the debt settlement plan has been drawn up, it is proposed to the creditors. It is essential that this proposal contains a date on which the planned payments will be made. In addition, confirmation of the proposal should be asked directly. The whole process is also called debt restructuring.
By the way: If you do not earn your own income, you may have difficulty financing a debt restructuring. Nevertheless, taking out a loan to support the renovation is often neither easy nor sensible. Most financial institutions refuse to grant loans if the borrowers do not have their own income. Loan offers in such situations are most likely dubious and should be viewed with caution. Foreign loans may be a legitimate option, but often have high interest rates and terms, so high rates and long terms are to be expected. Possibly the smartest solution for non-self-employed debtors could be a job center loan
The part of the extrajudicial debt settlement in which the creditor releases part of the debt from the debtor is understood as a debt comparison. Why should creditors get involved? In case of doubt, the alternative is the bankruptcy of the debtor. This is not only expensive, but if the debtor’s assets are too low, it can result in the creditor receiving nothing from his claims. By agreeing to a debt settlement, he could receive at least part of the claims. For the debtor, a debt comparison has the advantage – in addition to the obvious: avoiding bankruptcy.
The last way out of debt is bankruptcy. The actual procedure for debt relief takes approximately one year, but the debt relief only takes place at the end of a behavioral phase of up to six years. Only at this point is the debt crisis really over, because until then the bankruptcy court can refuse to discharge the remaining debt if there are good reasons to do so. Examples of important reasons would be:
- Bankruptcy crimes
- Incorrect information during the bankruptcy proceedings
- Violation of the obligation to cooperate and provide information
- Violation of the obligation to work
After the debt relief, only new debts and some special debts such as tax crimes or maintenance obligations remain during the procedure. All other debts are canceled.
Professional debt relief – where to find it?
You can find professional debt relief in various places. Charities, municipalities, the chambers of industry and commerce, as well as lawyers, notaries and tax advisors offer various advice options. While state offers are often free of charge, legal offerings in particular are chargeable and should be checked for their ability to deliver good advice.