When you’re facing an insurmountable mountain of debt, it’s an awful and crippling feeling. As our economy struggles, many Albertans and small businesses helplessly watch their monthly debt levels grow. As your small business accountant, we want you to know you’re not alone and you have resources that can help.
Do you have too much debt?
Most of us have debt, either personally or as a small business. But how much is too much? Take Money Mentors’ Debt Management quiz to see where you stand.
Who is Money Mentors?
Money Mentors is an Alberta-based, non-profit credit counselling agency that helps families and individuals recover from financial crises and move forward. From credit counselling and money coaching to retirement planning and community financial literacy, they’re committed to creating a healthier financial future for the province. We’ve included many of their tips and advice in this blog.
Tips to manage personal debt
1. Make a plan to get out of debt
The best way to get out of debt is to create a budget you can stick to. It helps to get advice from professionals, too. You can make a free appointment with Money Mentors, where one of their Credit Counsellors can walk you through a spending plan to help you manage your debt.
Read our blog, Personal Finance 101: How to create a budget for your lifestyle.
2. Prioritize your debts
Which debts should you pay down first? The largest debts, or the ones with the highest interest rates? Get a good line of sight on your entire debt situation – write down all your debts and order them in terms of interest or debt load.
Money Mentors offers a handy Debt Repayment Calculator to help you figure things out.
3. Pay more than the minimum
It’s time to start chipping away at your debts and bringing down your payments. Now that you have a workable budget, use any extra money to start paying more than the minimum balance.
4. Roll down your debt
This is sometimes called the Avalanche method of paying down your debts, which helps you pay less interest over time.
Choose the debt with the highest interest rate and start paying that off. Then, you choose the debt with the next highest interest and target that.
Money Mentors has a calculator for that, too!
5. Negotiate with creditors
If your credit score is reasonable and your debt load isn’t too high, there may be an opportunity to negotiate with your creditors. This could involve a debt consolidation loan or an interest rate reduction.
If you have multiple different credit card debts, a debt consolidation loan can bring all those debts together under one monthly payment at a lower interest rate than you had previously paid.
6. Chat with a credit counsellor
Getting out of debt is a difficult task. But it’s even more difficult to do alone. That’s why getting help from an accredited, non-profit credit counsellor is so important. Money Mentors sees people daily who need help with their budget or want to know more about their credit score. They have credit counsellors in Calgary, Edmonton, Medicine Hat, Red Deer and Lethbridge.
7. Increase cash flow
If you find yourself with extra time on evenings and weekends, a second job, revenue stream or a side hustle can be a great way to give yourself a financial boost. You can also consider using Kijiji or Facebook to sell unwanted items that have been gathering dust at your home or business.
What about your business’s debt and cash flow?
Debt and cash flow go hand in hand to influence your small business’s financial health. Adequate cash flow is crucial to meet your ongoing operational expenses, and debt obligations such as loan or interest repayments directly affect your available cash flow. Here are some ideas to maintain a healthy balance:
Forecast your cash flow
Implement cash flow forecasting to anticipate your business’s potential busy and slow seasons. Being proactive allows your business to plan for debt repayment during periods of higher cash availability and strategize for leaner times.
Streamline your accounts receivable
Adopting efficient strategies for managing receivables is crucial to maintaining a steady cash flow. You can minimize the chances of receiving late payments by improving your invoicing and payment collection procedures.
Negotiate with creditors
Chat with your creditors. Most prefer a cooperative approach and may be open to assisting small businesses facing short-term financial difficulties.
Create an emergency fund
Establish a safety net with an emergency fund. This reserve can act as a financial buffer during lean periods, preventing minor cash flow issues from escalating into a crisis (and reducing the need to incur additional debt).
Contact your accountant
Your accountant can help you recognize and take advantage of financial openings to maximize your cash flow and profits. They can do this by increasing tax savings, reviewing costs and pricing, forecasting cash flow and helping you get paid quicker.
Read more in our blog, Maximizing your practice’s cash flow with the help of an accountant.
Alternatives to bankruptcy
If you feel like you’re in over your head, you may be considering bankruptcy. But before you do anything drastic, ensure you’ve explored your available debt relief options:
Debt consolidation or refinancing
Debt consolidation loans let you combine your debts into a single monthly payment. Your bank will evaluate your eligibility for a consolidation loan based on your credit score, income and debt amount. This approach typically results in lower interest payments, and you might retain access to the credit cleared by your consolidation loan.
Orderly Payment of Debts (ODP) Program
In Alberta, the Orderly Payment of Debts (OPD) program, managed by Money Mentors, offers another option. It provides a fixed 5% interest rate and a plan to settle all your debt within five years.
This debt management program is legislated under the federal Bankruptcy & Insolvency Act (BIA) and supervised by the Province of Alberta.
Learn more about the Alberta OPD program
Consumer proposal
A consumer proposal is another option. It’s a formal, legally binding agreement between debtors and creditors that allows debt settlement. This approach is for individuals who owe less than $250,000 (excluding mortgage debt) and cannot pay their debts. A Licensed Insolvency Trustee (LIT) works with you to formulate a proposal for your creditors, subject to their approval.
However, this process has associated fees and can be more expensive than other debt-relief methods like the OPD.
What if you do need to declare bankruptcy?
Nobody wants to go into bankruptcy, but it happens. While it's not ideal, bankruptcy can provide an opportunity for a fresh start and a chance to learn.
Read our blog, Bankruptcy: How to get in and how to get out to learn what happens when you declare bankruptcy.
Find more Small Business Basics topics that may be helpful to you and your company. And reach out to us if you’d like to chat about how True North can help you with small business debt.
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