Dry Cleaners and Debt Management (Conclusion)

CHICAGO — While debt can be a powerful tool for building, maintaining and growing small- to mid-sized business like most drycleaning companies, it also introduces an element of risk. The quicker an owner can clear his or her books of debt, the more secure their company’s future will be.

Debt management was the topic of a recent webinar hosted by the Service Corps of Retired Executives (SCORE), and presented by Juliana Ramirez, an accounting expert, entrepreneur and small business bookkeeper for more than 20 years.

In Part 1 of this series, we examined some debt management basics, including the different types of loans and credit available to small- to mid-sized businesses like drycleaning companies. In Part 2, we looked at how debt can affect a business, and how owners can get a true picture of their current debt. Today, we’ll conclude this series by exploring different strategies to pay off debt, how to negotiate with creditors and final thoughts on the topic.

Debt Prioritization

While there are many methods of paying off both business and personal debt, Ramirez highlighted two popular means — the Snowball and the Avalanche methods — which have proven effective for many over the years.

Snowball Method — “This is a strategy for paying off debt that focuses on paying debt in order of smallest to largest, regardless of interest rates,” Ramirez says. “This method is particularly effective for individuals or business owners who benefit from seeing quick results, and need motivational boosts to stick with that debt repayment plan.”

The steps involved with the Snowball Method. Ramirez says, are:

List all debts in ascending order — Make a list of all your debts from the smallest balance to the largest, regardless of the interest rate.
Make minimum payments on all debts — Continue making the minimum payments on all your debts, which is essential to keep all accounts in good standing.
Focus extra payments on the smallest debt — Any extra money for debt repayment goes toward the smallest debt first. This could be from cutting expenses, increasing income or budget adjustments.
Eliminate debts one by one — Once the smallest debt is paid off, the money used for its payments and extra amounts are then redirected to the next smallest debt.
Continue until all debts are paid off — Repeat this process, rolling over payments from paid-off debts onto the next smallest debt, and continue this pattern until all your debts are paid off.

Avalanche Method — “This is a strategy for paying off debt that focuses on clearing debts with the highest interest rates first,” Ramirez says, “while making minimum payments on the other debts. This method is often recommended for its financial efficiency, and aims to minimize the total interest paid over time.”

The steps involved with the Avalanche Method, which are similar to the Snowball Method, Ramirez says, are:

List all debts by interest rate — Organize all your debts in order of highest to lowest interest rates, regardless of the balance on each.
Make minimum payments on all debt — Continue to make the minimum payments on all your debts to keep the accounts in good standing.
Focus extra payments on highest interest debt — Direct any extra money for debt repayment toward the debt with the highest interest rate first.
Move to the next highest interest rate — Once a debt with the highest interest rate is paid off, take the money that was going toward it and apply it to the debt with the next highest interest rate.
Repeat until all debts are cleared — Continue this process, reallocating payments from cleared debts to the next highest interest that until all debts are paid off.

Pros and Cons

It’s important to consider individual financial situations and preferences when choosing a debt repayment strategy, Ramirez says, and each of these methods has its own advantages and disadvantages.

Snowball Advantages — “It can provide motivational boosts,” Ramirez says. “Paying off smaller debts first provides quick wins, which can be highly motivating and encourage you to keep going. It also simplifies money management. As you pay off each debt, you have fewer payments to manage each month. And there is a psychological satisfaction in seeing the number of debts diminish, which can be more encouraging than just watching the total debt decrease.”

Snowball Disadvantages — “The disadvantage here is that it’s a potentially higher cost,” she says. “Since the interest rates are not considered, you might end up paying more in interest over time compared to methods that prioritize higher interest rates.”

Avalanche Advantages — “This method provides you lower overall interest costs,” Ramirez says. “By focusing on high interest debts first, you’ll reduce the amount of interest paid over time, making it a financially efficient method. And it also can provide faster debt reduction. In the long term. You can pay off your total debt faster, as less money is lost to interest.”

Avalanche Disadvantages — “With Avalanche, there is, potentially, slower initial progress,” she says. “It might take longer to pay off your first debt if that debt has a high balance. This can be less motivating for some individuals or business owners. It also requires discipline. This method requires strict adherence to the strategy and might not provide the same psychological boost as methods that offer quicker wins.”

Either of these solutions, Ramirez says, will achieve a business owner’s debt reduction goals: “It’s important to choose a debt repayment strategy that aligns with your financial situations and personal motivation style.

Negotiating with Creditors

If a company’s debt becomes unmanageable, Ramirez says, approaching creditors for term renegotiation or settlements can be a viable option to manage debt more effectively.

When negotiating with creditors, Ramirez offers 12 steps to make the discussion, and potential resolution, more successful.

Assess your financial situation — “Before contacting any creditors,” Ramirez says, “have a clear understanding of your financial situation. Prepare a detailed list of your income expenses, debts and assets.”
Know what you can afford — “Determine realistically what you can afford to pay,” she says. “This will guide you in making feasible proposals to your creditors.”
Do your research — “Understand the terms and conditions of your existing debts,” Ramirez says. “Know any penalties, fees or charges associated with changes to your debt agreements.”
Prepare and proposal — “Develop a proposal for new terms that would make your debt more manageable,” she says. “This could include requesting a lower interest rate, extended repayment terms, or a certain settlement amount.”
Contact creditors early — “Don’t wait until you are significantly behind on payments,” Ramirez warns. “Approach creditors as soon as you perceive difficulties in meeting your obligations.”
Be honest and transparent — “Explain your financial situation honestly,” she says. “Provide evidence, if necessary, like changing income or unexpected expenses.”
Be professional and courteous — “Maintain a professional and respectful demeanor,” Ramirez advises. “Remember: You are asking for their cooperation.”
Be persistent but patient — “You may not get a positive response immediately,” she says. “Be prepared to follow up and negotiate, but also be patient as creditors evaluate your proposal.”
Get agreements in writing — “If the creditor agrees to new terms, ensure that you get the agreement in writing,” Ramirez says. “This protects both parties and avoids future misunderstandings.”
Consider professional advice — “If negotiating feels overwhelming,” she says, “consider seeking advice from a financial advisor or a debt counselor.”
Explore all options — “If one creditor is unwilling to negotiate, try others,” Ramirez says. “Different creditors may have different policies regarding negotiations.”
Understand the consequences — “Be aware of any potential impacts on your credit score or tax implications resulting from debt settlements or changes in loan terms,” she says.

“Approaching creditors for renegotiation or settlement is a proactive step in managing your debts,” Ramirez says. “It’s important to approach this process thoughtfully and realistically, with a clear plan and willingness to find a mutual beneficial solution.”

Final Considerations

Ramirez closes by urging business owners to consider alternative financial options, such as refinancing and consolidating their debt, after they have made the evaluation and the informed decision of what is the best approach for their situation.

“Also consider government grants and support,” she says. “The Small Business Administration has different products available for small businesses, and government grants and support are also a key component available to all small business owners.”

Finally, Ramirez warns business owners to avoid pitfalls that are common when it comes to business loans and financing.

“Understand the risks of taking more debt,” she says. “Make sure that you understand your financial position and the performance of your business so that you can make an informed decision.”

Finally, Ramirez says to take every effort necessary to avoid predatory lending.

“These are lenders that are willing to loan you any amount of money, with or without collateral, but at very high interest rates,” she says, “something beyond what you would normally be able to afford. In a tight situation, this may seem like the right thing to do, but it never is.”

For Part 1 of this series, click HERE. For Part 2, click HERE.