Paying off business debt?

I have a small business in its second year of operation.

The good news: We're profitable now.

The bad: We were undercapitalized and made some mistakes in the beginning. We've racked up some $40,000 in debt, to a variety of suppliers and even $10K to the landlord. Everyone has been patient thus far, but time is running out.

We are profitable, but after payroll we only clear about $1000 - $2000 per month in profit.

My question is how do other businesses deal with problems like this? I'd love to consolidate these debts somehow, but my credit is largely shot due to the whole undercapitalization thing. What do I do?

My business is grossing $250,000 per year, I don't want it to go under.

total debt = $40,000

Your question is filled with unknown facts. First, and most importantly, you should be able to pull out of your mess if your creditors continue to help or if a bank or someone bails you out. The problem is that most financing providers don't want to wait 20 to 30 years to collect the principal of their loan. Worse, they don't even like to finance existing debt, they would rather finance new equipment or something else tangible. If you don't have one already, create a business plan. You will want to create a crystal ball for you and others to see your future. You'll need a flexible budget (with different business levels, one where you're at today, one where you'd be if your business dropped by 20%, and one if your business were to increase by 20%.) You'll also need a current and accurate set of financial statements - balance sheet, income statement, and cash flow statement. Contact your bank, one of their competitors, and the Small Business Administration and ask them if you might qualify for a long term note to make your operations more liquid. Your best alternative would be to get a loan.

I'm assuming that you're taking money out in some manner for yourself in the form of draws or salary? If possible, find a way to reduce that amount until you've repaid your creditors. If you are truly interested in saving your business, you will need to toughen up. Just because you have a business doesn't mean that you are entitled to spend your creditors money on yourself. Where else can you cut costs? Did you get competitive quotes on insurance? Are there better prices for your supplies and inventory? Can you pare down on your help? You aren't too far from pulling this off, but you'll need every cent you can come up with for a while until everyone is paid.

Consider adding a partner to your business. You'll have to share the profits, but if you pick up the right person(s) your profit could be increased by more than you're adding in cost. Contact some local cpa's and ask if they know anyone interested in a business venture like yours.

Your creditors have been patient. Trust me, they will likely continue to be. One thing everyone likes is honesty. Try to come up with a plan to make everyone happy. Call your creditors and let them know what's up. Tell them that you're willing and able to pay them, but it's going to take a while and it's going to take their continued patience. The last thing they want to do is to tell you to jump in the lake. A dollar tomorrow is worth infinitely more than the prospect of getting nothing today.

Finally, you can file for one of the bankruptcy options. It sounds to me like you are a good candidate for chapter 11 (reorganization.) The bad things are that your credit will be worse and a large part of the money available will go to the lawyers instead of to your creditors or to you. The good thing is that you will be able to legally shrink your debts and pay a very manageable payment until your creditors are re-paid. You can probably get away with paying $200 a month or so.

Try getting a loan on Prosper.com. Under-capitalization is the biggest cause of business failing.

Good Luck

I would go to a local credit union and try to apply for a line of credit. Be sure to have all current balance sheet and profit and loss statements to show that your financial situation is profitable. They are much more forgiving than a bank. Whatever you do dont go to the business loan sharks. My former employer did this when he was desperate to cover his new construction debt and ended up losing his business of 15 years. If anyone thinks you are vulnerable they will take advantage of you. Also contact the Small Business Administration, they are a great source of information. If all else fails contact any attorney that specializes in business debt.....reorganization may be a difficult option but better than total loss.

Consolidating debt is an ideal way to reduce your amount and tenure of debt. You make a single payment to one lender on a certain date and this will help you clear off the debts faster. But the fact remains that debt consolidation is not easy all the times. If you owe a lot of money, obtaining a consolidation loan at the lower rate of interest can be difficult. Choosing a high interest loan can increase your debt.The primary aim to consolidate debt should be to reduce your total costs.