The less-than-stellar economy in the second half of 2022 that lingered through 2023 and much of 2024 put many owner-operators, especially independents, in a tight financial situation.
Even in more ordinary times, it’s not unusual for a struggling business owner to consider some kind of relief in the form of lending, taking on debt to stay in business. Be very wary of credit card debt, easy to run up and usually carrying very high interest rates. Also beware other loans with high rates and high late-payment penalties, such as merchant cash advances.
Following find other lending resources, as well as strategies other than borrowing, that an owner-operator or small fleet business could tap to help manage a cash-flow crisis.
U.S. Small Business Administration (SBA) loans. Long before 2020’s federal Paycheck Protection Program, a pandemic-relief program administered by SBA through banks, SBA loans had been considered some of the best for small businesses, particularly the SBA 7(a) loan. You have to work through one of the agency’s approved banks, but the terms are likely to be better than what you’d get working through a bank outside of SBA.
Bank lines of credit and term loans. These are common for small-business borrowers. Most term loans require repayment in one to five years.
Personal loans. Friends and family are traditional sources of borrowing or investing for an individual with a small business.
Tapping retirement savings. Perhaps you have 401(k) savings from prior work as a company driver. Or you or your spouse have Individual Retirement Account savings. These can be attractive funding sources, but withdrawals before you turn 59.5 will incur a 10% tax penalty -- with a few exceptions. For example, you can borrow from a traditional 401(k) and pay back the money over five years. Interest accrues to your account, but there is no penalty. If you're saving in the Roth variant of an IRA or 401(k), the already-taxed principal contributions can be withdrawn without penalty as well. If you dip into the earnings, though, you'll be taxed on those.
Debt consolidation. When a small business finds itself drowning in loans whose debt service exceeds the business’s revenue, consolidating the debt into a single loan is one option. The goal is to lower monthly payments by lengthening the repayment schedule so the business can stay afloat. Experts caution that terms can be onerous and do little to help the owner’s long-term prospects.
Debt forgiveness. Certain lawyers and other specialists can help heavily indebted borrowers to negotiate with creditors a reduction in debt. The approach can wipe out thousands of dollars in debt, but one downside is taking a hit to your credit rating, which drives up the cost of any future borrowing. Another downside: your legal fees to the negotiator can be substantial.
Bankruptcy. Filing for Chapter 11 bankruptcy -- a plan to reorganize debt while continuing to operate -- often isn’t a good choice for a small business. Chapter 11 is an expensive process that usually drags out over years. It’s more often used by large corporations, though a small business can find it more favorable than Chapter 7 bankruptcy filing because it gives a longer time -- 180 days -- to work out arrangements with creditors. Chapter 7, which allows only about two weeks, is intended for liquidating assets to pay debts.
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