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The COVID-19 pandemic is shaking the world and ripples from it will be felt for years to come. Small businesses, in particular, are suffering because of it and a great number of them will close because of this crisis. Even before this pandemic, the small business debt crisis has been getting worse. Right now, the situation is exceedingly bad and there is no doubt that millions of SMEs will not make it. Therefore, every business owner should start developing a debt management strategy.

Global Business Debt Crisis: What the Future Holds

It’s hard to say exactly how many of the world’s businesses are struggling with debt. However, there is data that indicates the global debt has grown beyond 320% of GDP. It’s now beyond $255 trillion and still growing. This level is $87 trillion higher compared to the beginning of the 2008 global economic recession.

Small businesses are hefting the greatest part of this burden. And you also shouldn’t forget that they make up over 80% of all businesses in the world. Therefore, they are disproportionally affected by both debt and financing issues occurring right now.

In these circumstances, it’s no surprise that SMEs are starting to shut down wholesale. Filing for bankruptcies has increased by nearly 25% during the first half of 2020. That’s only the beginning as more SMEs are running out of money every day.

So, loans are the only solution they might hope for. However, there is a simple truth that has been around since loans were invented, small business lending = high interest rate. But the same crisis that put SMEs at such great risk changed this rule. Interest rates always drop during a recession, which can be a good thing for all those businesses that need financing. Today, there are also a variety of coronavirus relief programs backed by governments. They aim to help business owners in different ways. However, their efficiency is debatable.

The biggest issue is that while the demand for loans is high, lenders have dropped their activity. Risks for them increase exponentially as businesses are failing and defaulting on their existing loans. Therefore, actually getting any type of financing is very difficult now. This is why every business owner needs to prepare and cope with their debt.

How to Cope with Business Debt: 5 Tips to Prepare Mentally

1. Focus on the present.

During difficult periods, it’s easy to fall into the trap of finding something or someone to blame. However, right now you can’t allow yourself to dwell in the past and think about how different choices could have led to different results. Instead, you should focus on here and now. Assess your current situation and think about how the steps you take will affect your future. Whatever mistakes you made have already happened. You can’t do anything about them now, so don’t stress yourself further. It would be more productive to avoid repeating them. You should consider scheduling appointments with your closest advisors and business counterparts to understand how flexible they can be in terms of dealing with some of the challenges faced from the pandemic, even now that it’s 2021.

2. Regain control.

Debt might seem to sweep your business up like an avalanche. Therefore, it’s essential to regain control of your finances as quickly as possible. Start by making a detailed list of exactly what you owe. Then, develop a plan for dealing with each of these debts. Even thinking about them and writing out these things on paper will help you regain some control. This means you will be more efficient in making plans that can actually work.

3. Face the problems.

You cannot allow yourself to bury your head in the sand and ignore the issues. Instead, face them head on, regardless of how bad the situation is. Without acknowledging each of the problems your business currently has, you won’t be able to move on to solving them.

4. Keep looking for new solutionns.

Having a plan for debt management is all well and good. However, you need to stay active and explore new solutions if they appear. Right now there are many relief programs and grants for businesses affected by the COVID-19 crisis. These solutions change and evolve. Therefore, you should stay on the lookout for any option that can benefit your business.

5. Accept that you will have to make hard decisions.

Debt management is difficult and you must be prepared to accept losses. It might even be necessary to give up on your business completely or cut down staff and expenses. These decisions will be difficult and they will make you feel awful. However, those are necessary hard choices. Therefore, you should start preparing mentally for the inevitable fallout.

Making a Debt Management Plan for Post-Pandemic Recovery

If your business is already drowning in debt, you need to start acting immediately. First of all, you need to analyze your finances and budget. You must know every penny you have and what you owe.

The next step is to focus on debt consolidation. Now is a great time to refinance your loans if you can get this type of financing. Therefore, you should apply to several possible lenders. 

In the meantime, start negotiating with your current lenders. Perhaps, you will be able to negotiate better terms even without refinancing. Lenders are also affected by the crisis. Therefore, they are interested in retaining paying customers.

While you are doing that, you should also apply for any coronavirus relief you are eligible for. However, remember that some of the COVID-19 loan programs have very restrictive forgiveness terms. Therefore, if you aren’t sure that the loan will be forgiven, taking it might be too risky. But you definitely should explore every option that can provide some aid.

Finally, prioritize your list of debts and cut down your expenses ruthlessly. It’s highly likely that you won’t be able to keep up with some payments. Think carefully about which loans you can give up right away and which you must pay off ASAP.

Most importantly, note how you should take all these steps at once. Debt management in a crisis requires exploring every possible route. And remember that time is of the essence. You need to research every possible option to make the best decisions you can. It would be a shame to miss out on some relief programs just because you were too focused looking for refinancing.

Post Author: Ben Tejes

Ben Tejes is a co-founder and CEO of Ascend Finance. Before Ascend, Ben held various executive roles at personal finance companies. Ben specializes in Chapter 13 Bankruptcy, Debt Settlement, Chapter 7 Bankruptcy and debt payoff methods. In his free time, Ben enjoys spending time going on adventures with his wife and three young daughters.

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