How does someone pay off debt when they own a small business?

[P938LVR]

If someone owns a small business and would like to start paying off debt how would they go about it? In this hypothetical small business there is equipment that needs maintenance and repairs about every couple of months and it can at times be costly.

How do you balance maintaining the business and paying off debt while still supporting a family especially when it seems like things are breaking every couple of months?

[soccerluvof4]

Weather its business debt or personal debt take you expenses over the length of your business or if its been shorter your history and find out what it costs a month to run including what your paying yourself.  Factor 10% above that monthly and anything else apply to your debt. Kinda hard to give to much advice with no numbers. At the end of the quarter take out the half of the 5% you have saved up and repeat. As I mentioned to be more hardcore on the matter would need to know all the numbers and ins and outs. Pay what you feel comfortable for a while and adjust as you go.

[tmac]

We paid off $250k in 6 years while running our business. We paid ourselves a salary that was 3/4 what we otherwise could have -- just enough for a modest life -- and used the rest to aggressively pay down the debt.

[nicetry]

I thought small businesses have high returns usually, so it is best to use the money to invest/grow their business rather than pay off debt. But I am not a small business owner. I would like to hear from small business owners on this topic.

[Weedy Acres]

Pay yourself modestly--just enough to live off of--while you're in business debt.

Calculate your average monthly cost of repairs.  Save up 3-6 months in an "emergency fund."  Then toss the rest of your monthly profits at the debt.

[dandarc]

I thought small businesses have high returns usually, so it is best to use the money to invest/grow their business rather than pay off debt. But I am not a small business owner. I would like to hear from small business owners on this topic.

Depends on the business, and it can be very difficult to get it to compound, even if the cash is flowing reasonably well.  A dry cleaner vs a restaurant vs a tech startup vs renting out houses - these are very different businesses with different returns and risks involved.  And if the return potential is large, you can bet there is a huge risk as well - a well run, trendy restaurant can make gobs of money for the owner, and yet something like 90% of restaurant start-ups fail within one year.  So even if you have a successful, profitable business, it still may be wise to pay off debt to lower  your risk exposure - certainly a balance needs to be reached.

Another factor in the 'high returns' that some small businesses make is the owner's labor - quite often the profits aren't that great if you had to pay a manager, and often the business does not perform nearly as well without the founder involved - this can put a cap on the scalability of the business because there are only so many hours in the day and the founder is but one person.

[Northerly]

Speaking as a former small business owner: if you can't do routine maintenance from your business working capital, then your business is not profitable or has serious cash flow issues. It sounds as if you are barely getting by (it was once the same for me). If you are not in the midst of a turnaround, I would recommend getting out and making financial independence (and debt payment) your first priority.

As a reality check, look at last year's 1040 and your adjusted gross income. That is reality.

[pucksr]

Some of this advice is a bit sketchy. A lot of your approach to business debt depends on the type of corporation, the age of the owners, etc.
I would HIGHLY advise you hire an accountant.

Some corporation types make owners personally responsible for debt, while others absolve them from debt responsibility.
Why does this matter? If your business winds up going under, you may or may not be required to pay for it. This is very important in deciding on the priority of your business deb

[usmarine1975]

Set a payment on the debt that you can afford while covering the maintenance etc...  If you have extra cash set it aside for when you don't. Pay yourself an hourly wage and stick to it. A business should have a budget as well..

[ShortInSeattle]

Speaking as a former small business owner: if you can't do routine maintenance from your business working capital, then your business is not profitable or has serious cash flow issues. It sounds as if you are barely getting by (it was once the same for me). If you are not in the midst of a turnaround, I would recommend getting out and making financial independence (and debt payment) your first priority.

As a reality check, look at last year's 1040 and your adjusted gross income. That is reality.

+1

[lakemom]

1.  Budget off the lowest income months.  If the lowest income doesn't cover basic monthly expenses (including owner draw) its a hobby and should be grown into a business or closed.

2.  Set up a Preventative Maintenance schedule for equipment.  This should be part of the monthly budget such that in any month where you have an equipment failure there are funds available for the repair BUT with a PM schedule, many repairs that now come across as emergencies are anticipated and planned for.

3.  In months that are high income start setting up an "emergency fund" of 3 months of business expenses and start an ongoing fund for equipment replacement if its expensive enough that repalcement can't be cashflowed out of monthly income.

4.  Once the EF is in place, on high months take the "extra funds" and pay off a chunk of the debt.  Once all the debt is gone and the monthly payments along with it give the owner a raise.


We run a very seasonal small (really micro right now) business so we make sure that we bank enough over the summer to cover the off season expenses, insurance, and the costs for marketing upon start up in the Spring.  Anything over that is our profit for the year (ie spendable/savable cash).