No doubt about it, debt can kill a small business, and seriously hurt your chances of reaching a finance company for a small business loan or other financing.

So here is an important thing to remember: Managing your debt load is just a piece of your overall debt puzzle. And recognizing red flags that indicate you are in trouble is another.

The bigger picture - how debt can impact your small business, the steps you can take to control debt, credit and borrowing issues, and who to go to for help if you need lending help - those are the underpinnings of the debt management structure.

It’s also important to understand what debt management is not.

It’s not, for example, another name for bankruptcy, although that’s a common misnomer. Debt management doesn’t mean you are in bankruptcy, or even on the way there. Bankruptcy is usually reserved for those who can’t pay their debts and need legal protection. Debt management is reserved for those who can pay their debts, but need a little help in doing so.

Put it this way:

Bankruptcy is permanent and debt management is temporary.

Bankruptcy is for small business owners who don’t even have enough cash on hand to pay for food and shelter. Debt management is for people who can’t afford to pay all of their debt obligations.

Bankruptcy is for small businesses that have no money to pay creditors. Debt management is for people who have simply fallen behind on their payments to creditors.

Bankruptcy is for small business owners who can only afford to pay cents on the dollar on their debts. Debt management is for people who plan on paying 100% of their debts (with a potential break on interest, depending on the good graces of their creditors).

Bankruptcy is for small business owners who will soon lose some, most or all of their assets. Debt management is for people who don’t lose assets.

Bankruptcy is for small business owners who may never get credit again. Debt management is for people who will get credit again.

In short, debt management is a viable alternative to bankruptcy for those entrepreneurs who can afford to meet their debt obligations. But note that, if a bleak debt situation goes largely ignored, the path from debt management to bankruptcy can be a short one.

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It’s a fair question. In fact, Old King Solomon would have a difficult time deciding what to do.

But there is a guiding light out there in the economy that can help you decide — interest rates. Why should it all come down to interest rates? In our dilemma here, it’s a good idea to invest money if you can earn a higher interest rate than you are paying on your loans and debts. For example, if the interest rate on your small business loan is six percent and you invest in a mutual fund that promises a higher return, then your money is working harder and smarter for you as an investment.

That said, there’s no guarantee that your mutual fund will even earn four percent next year. Heck, it could lose four percent.

So that’s why I favor paying off your debt first. The interest rate fees you kill by paying off the loan alone make that strategy a savvy move. And being debt free is a small business owner’s dream.

But I also come down on the side of practicality. If you insist on going the investor route, put the maximum you can in your self-employed retirement plan (SEP). In a word, SEP’s are like a “Solo” 401(k) that cater specifically to small business owners and sole proprietors who want to save for retirement on a tax-advantaged basis. Since your retirement plan distributions are tax-deferred and come out of your own pocket as a gross, and not net, amount of your earnings, you’ll hardly notice the money is missing.

It’s simpy a matter of paying yourself first.

Come to think of it, paying yourself first is a good debt strategy of its own.

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Here are some common financial “red flags” to look for in your busy life:

Your bank account is consistently overdrawn – If you keep getting those thin envelopes in the mail from your bank telling you that your checking account is overdrawn, it’s time to regroup and find out why you’re not keeping up. Tip: Ask your bank for overdraw protection against your checking account. For a few bucks each month, most banks will be happy to comply.

You are only able to make the minimum monthly payments on your credit cards — A biggie.  If you can’t maintain a clean credit card bill each month then you’re staring at big trouble down the road. At 15 percent or so interest, card companies clean up when you only pay the bare minimum of your monthly bill. At those rates, that new jacket you bought for $80 three months ago can cost you $350 in a few months if you don’t pay your credit card bill in full. Tip: If you have multiple credit cards, cut all of them up save one. And only use that for emergencies.

You and your partner – if you have one — are arguing about money – Money is an emotional issue; a power struggle sometimes between couples who usually have different ideas how cash should be handled. If you and your spouse or partners are haggling over bills more than usual, it’s probably because your bills are higher than usual. Tip: Agree on a budget and a spending allowance, if necessary. Then stick to it.

Your savings account is busted – Money experts agree that a savings reserve of six-months worth of your annual salary is mandatory to ride out rough economic times, like the loss of a job or a serious illness. If you don’t have any money at all in your savings account, it’s time to re-examine your budget and see where your money is going every month. Tip: When you get paid pay yourself first – meaning take 10 percent of your check out and stashing it in a savings or money market account.

You are juggling your monthly bill payments – If you’re applying selective reasoning to your monthly bill payments (“Hmmm – we’ll pay the phone bill this month, but not the dog walker”) then you’re in over your head financially. Tip: Lose the dog walker and any other luxury item on your “to pay” list. In tough times stick to the staples: home, heat, groceries, and electricity. You might not think about it, but 20 years ago, nobody had an Internet bill or a cell phone bill. But you probably do now.

If the first step in getting out of financial trouble is knowing that you’re in financial trouble, then the next step is to take action to get out of that trouble.

First item on the menu is to budget your expenses. We’ll talk about that extensively in this blog. Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses (such as housing and health care) and optional expenses (such as entertainment and vacation travel). Again, make sure you stick to the plan.

Then try and cut out any unnecessary spending such as dining out too much and haunting Circuit City, E-Bay or Home Depot. Don’t be above clipping coupons or purchasing generic products at the supermarket. If you feel you can’t resist using your credit card switch to a bank debit card where money is immediately draw from your checking account to pay for a purchase.

If you have revolving credit card debt try using money from your savings account (normally they’re low-paying interest accounts) and use the cash to pay off your high-interest rate credit card bill.

Above all else, formulate a financial plan for the short and long term that includes a monthly budget and a savings account deposit goal of six months of your annual salary. Build a plan that will allow you to meet your basic life needs and one that will allow you to sleep at night. If you do create and maintain such a plan, you’ll be sleeping like a baby before you know it – and not a red flag in sight.

I believe the reason for people to get into serious debt situations is a lack of a real-world financial education. How to budget. How to live on a limited income. How to avoid credit troubles. Those kinds of things.

One solution to the problem – an easy one in my book – is to tally up your income and your outflows and see where you are, debt-wise. Another is to recognize how much debt is too much debt.

There are some other big, hard-to-miss red flags that tell you you’ve accumulated too much debt. Here are a few signs that you just might have too much debt:

If you haven’t got more than $10 in your savings account, and haven’t made a deposit to savings in months, you just might have too much debt.

If you’re in the habit of post-dating checks, you just might have too much debt.

If you habitually pay bills late, you just might have too much debt.

If you had to sell valuables, like a car, an old baseball card collection, or a family heirloom piece of jewelry, you just might have too much debt.

If you habitually pay the minimum on your credit card statement, you just might have too much debt.

If you’ve ever taken a cash advance on a credit card to pay off another bill, you just might have too much debt.

If you’re forever borrowing money off of family and friends, you just might have too much debt.

If it’s early in the calendar years and you already have a cash “crisis” you just might have too much debt.

If you’re surprised by the amount of money you owe on your credit card, or the low amount of money you have in your bank account, you just might have too much debt.

If you live from paycheck to paycheck, you just might have too much debt.

To figure out if you have too much debt, use one of the many online loan repayment and income estimation calculators available on the Web. They’ll help you calculate how much debt you have, how much you can afford to pay, and help you develop a budget or action plan to get out of debt.

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If you do this over the period of the last year you will achieve a better understanding of where your money has gone and why you have landed in a situation where your debt is becoming insurmountable.

If your are in salaried employment then working out your income will be fairly straightforward and it should be relatively easy to make a list of your fixed expenses such as your rent or mortgage, your insurances and other factors such as utilities on monthly budget accounts. If your bank offers online banking services then this will make your task even easier. Start by checking the list of all your direct debits and standing orders and all your salary deposits.

You can make estimates of how much you spend on your shopping, or keep your receipts for the next few weeks for your regular necessities shopping. I would keep your shopping receipts for at least a month and use that total to base your estimate for the year.  With your other non-essential spending you might make an attempt to calculate how much money you fritter away from one week to another. I would recommend that you don’t estimate and ask for receipts for everything. You should total up this minor spending weekly as trying to keep all the receipts may be inconvenient. Almost everybody who does this exercise finds that they have underestimated considerably the amount of money that they have been spending.

To illustrate this check back on the last month, find out how much money was in your bank account right after you were paid then subtract your regular fixed outgoings, rent or mortgage, insurances etc. Then subtract your shopping for essentials, food, etc. How much money is left? Now how much do you really have? Where has the difference gone? This is your hidden spending, the money you fritter or don’t notice you are spending, this is the total that you need to address to start getting out of debt.

So where did all this money go? Often it’s the little things that you don’t consider worthwhile recording such as the cup of coffee you have every day with the occasional take-away that you have once or twice a week. Maybe it’s the magazines that you buy each week or some other relatively small expense that adds up with all those other relatively small expenses to create a big deficit in your finances over the term of the year or so.

These are the areas where you can cut back or eliminate spending that will, over time, have a huge impact on your ability to reduce your debt and remain debt free once you have put yourself in that position. A small cut in spending on many things will give you the extra money to pay back your debts quicker, once that debt is gone you will have the spare cash for the little luxuries in life.

Aside from debt that is accrued as a result of the obvious catastrophic reasons such as the loss of employment or the break up of a relationship, in normal circumstances debt can be attributed to “emotional spending”. We all have different reasons why we spend money, aside from the necessities in life, that we all require, food, shelter, transport etc. Outside of the necessities we will spend our money emotionally on those things that we require to satisfy any one of a number of emotional reasons, desire, jealousy, feelings of inadequacy, keeping up with neighbours, and so on. This emotional spending can even occur with the necessities, examples can be the social stigma attached to shopping at certain supermarkets. We know that we can save money by shopping in discount shops for some of our necessities, but do we want to be seen there?

Just as some people will reward themselves or find comfort in their favourite activities or food there are many who will spend money to reward themselves in response to various emotions. Most of us have occasions in our lives when some special event has happened or we have achieved something against the odds and we immediately feel like we need to go and celebrate. We will either buy a gift to reward ourselves, or a loved one that has something to celebrate, or we will go out and indulge ourselves by eating a meal at our favourite restaurant and taking along our friends. Many people buy material things in an attempt to make them feel better about themselves, at times when they are down emotionally. Often a reward or a desired item can be a great lift, even if we only reward ourselves.

It is not unusual for people with some forms of, or varying degrees of low self-esteem to spend money on items that they think will impress others. Showing off their material worth creates a feeling of well-being and achievement to overcome their esteem issues. This allows them, if only fleetingly to feel good about themselves and feel a sense of worth. People will sometimes buy an expensive car or the latest, biggest television to boost their ego and give them a reason to show off to their friends. People don’t just buy when they are down though, some people buy when they are happy, as the feeling of gain helps to maintain their happiness.

Many people these days buy on credit, on impulse, with no thought of how they are going to afford their purchases and no regard for the future and the fact that they are going to have to someday pay off the debt. The debt they have just incurred today will probably be around for the next year or so, maybe even longer, whilst they slowly pay it off. Impulse buying can be particularly dangerous, it is generally for items that you don’t really need, that you got caught up in the moment with and the debt that comes with these types of purchases is something that you definitely don’t need. These debts you will possibly regret for a long time when faced with the prospect of paying them off for a long time.

If you can define precisely why you buy, and this just takes a little thought, this will take you a few steps to being in a lot more control over your financial future. Consider the last few items you bought using credit and why you did so.  You will then begin to understand that the short term benefits that you gain from your spending sprees are certainly outweighed many times over by the stress and worry of the financial burden that they bring with them. Ultimately that feelgood credit purchase will have the reverse effect in the long term as it adds to an ever increasing mountain of debt. The classic vicious circle of debt causing misery, misery prompting the feelgood purchase, adding to debt causing misery. Breaking this cycle by understanding it, must be one of your objectives in your journey to debt freedom.

It might even be necessary to seek  professional advice to help you change these bad habits, that are getting you into financial strife on a regular basis. Make sure you shop around for free advice there is plenty around.More often than not our bad spending habits are just like any other bad habits that we are unaware of most of the time. By recognising and understanding our behaviour we can break these bad habits and start to manage our debts by not increasing them, then taking action to eliminate them.

You got a bad credit history by not either not making the payments that you owed on your credit or consistently making late payments. This poor payment record is recorded by a credit reference agency, two common to both the US and UK are Experian and Equifax.

This bad credit history usually remains in your name for 7 years in the US and 6 years in the UK and any time you go to borrow money, rent accommodation or virtually anything else that involves the need to check your credit standing you are going to be at a disadvantage.

So what can you do to make up for your past errors?

Simply by doing the opposite to what you did in the past and borrowing small amounts of money but ensuring that you pay them back on time all the time. This will start to build up a good credit history and will begin to compensate for your past efforts.

When many people get on top of their debt problems they are very reluctant to go back to borrowing again, however, in order to get your own house more often than not a mortgage will be necessary in order to buy it. This is just one reason that you need to start rebuilding your credit history and unfortunately the only way that can be done is by borrowing and proving that you can borrow responsibly.

You don’t have to borrow a lot of money and in fact it is better to do smaller amounts at various different places so you get good credit reports from a wider range of people.

Credit cards are the easiest way to get started rebuilding by making small purchases that are repaid straight away. Then buying the occasional item, provided it is a necessity and at low cost, on hire purchase. This will show a record of regular monthly payments over a set period of time and ensure that you don’t miss any payments to make the next step towards your goal of getting lending institutions the confidence to work with you further.

For a start having debt on appreciating assets such as a mortgage on your home can be a good thing. The value of your house will be increasing overall, despite current economic conditions, at a rate that is far greater than the amount of money that you could save over a long period of time. Quite possibly you would never be able to save the amount of money required to purchase a house in the first place. Remeber that properties have proven to be good medium to long term investments that can ride out short term economic downturns.

For most people their mortgage will be the only type of debt that is worthwhile having simply because the advantages far outweigh the cost of the debt in the form of interest. Traditionally mortgages have always has lower interest rates set than short term forms of borrowing.

The debt that is incurred for purchasing items that can’t be regarded as assets, for example motor vehicles where they are depreciating and you are losing money the longer you own them, can’t be regarded as good debt. Not only is the value of the goods depreciating but you are paying interest taking the total repayment way over the original price.

Credit cards are one of the biggest causes of financial problems in the country but they too have their uses and in particular when you’re trying to rebuild your credit history by taking out smaller amounts of borrowings and paying them back on time all the time. Getting small amounts of credit card debt and repaying it, can help you to move on to personal loans and then eventually you’ll have the opportunity to get a mortgage to purchase a house again even if your past credit history has been bad.

So you can see that in the right circumstances there are various reasons why debt can help you have a more fruitful life.However, racking up restaurant bills and purchases of the latest fashion items on your credit card can never be regarded as good debt in anyone’s books and is most likely to lead you into problems.

One way to determine how important a debt is can be by the impact that it can have on your life both now and in the future. Some people prefer to prioritise by affordability,i.e. pay off the easiest debt first, this can work with some strategies but can make you vulnerable in other ways. If you take the view that the important ones are the ones that can drastically affect your life then clearing any past due taxes would be one of the first debts that you would have to look at due to the penalties and compounding interest that you will have to pay and the fact that the IRS has so many powers to seize assets and make life very difficult for you.

A mortgage is another debt that needs to take top priority in the order that your payments are serviced as losing your house can impact on your ability to pay all your other debts and also make it difficult for you to find accommodation elsewhere.The last thing you want to be worrying about is where you and your family are going to
live. If you don’t have your own home then you need to ensure that your rent and utility bills are kept up-to-date so you keep a roof over your head and are able to live in suitable conditions to be able to work your way through your money problems.

The budget that you worked out will give you a clear indication of the total amount of debt that is owing to others and what your repayments are and from there you can set your priority list. Then you can start working with the people you owe money to in order of priority and sort out payment plans with your creditors and build your own steps to clear your debt.

Medical bills and court-ordered child support debt are also high on the priority list as failure to pay these can result in drastic action being taken that will once again make it difficult for you to work your way through your other debts.

Car loan repayments are a priority because car finance companies will quickly repossess your car if you fall behind with the payments and this can impact on so many other areas of your life such as your ability to get to your place of employment. Obviously not being able to get to work will be disastrous.

Don’t be forced into paying minor debts at the hands of debt collectors at the expense of being able to pay these priority debts first. You can take care of the minor debts when you have secured your home and a means of working.

Debt collectors are also aware of the fact that the majority of people don’t know the laws as they stand with their powers of collection and the rights you have that cannot be violated. They rely upon this ignorance to take advantage of their situation and make their jobs easier.They are only allowed to contact you between the hours of 8am and 9 pm and if you send them a written letter not to contact you again in relation to a particular debt they have to abide by that request and can only contact you again to inform you of any further action they will take in the recovery of the debt.

They cannot contact you at your place of employment if you inform them that this is not allowed and they are not allowed to contact you excessively as this is classed as harassment. This is of course a subjective point of view and if you claim harassment without a just reason, for example after only being contacted a couple of times this could go against you. Obscene or insulting language is also not allowed although many debt collectors will use such tactics to intimidate people and get them to pay more than they can comfortably afford.

Many debt collectors will buy your bad debt off your creditor and then it is up to them to recover their money from you so they can get quite aggressive in their methods of recovery. If you are in a position where you are expecting a debt collector, know your rights and don’t allow them to ‘bully’ you into making a payment that you can’t afford.

After all if you can’t afford it they will not get their money.Sometimes you will be able to discuss an arrangement with them to pay off the debt and this is obviously the best solution as they will get their money eventually and you will be able to pay it back at a rate that your budget has determined most suitable.

Always try to work through your money problems with those involved in an amiable manner as this is usually where you get the best deals that will keep both parties happy. The best way of all to deal with debt collectors is to not deal with them at all. By this I mean start a dialog with your creditors as soon as you get into difficulty, explain to them your situation and come to some agreement that you can afford and is acceptable to both sides. Then, as long as you keep to your side there will be no need for the debt collector.

If you have a lot of creditors or a lot of debt owing to creditors then you will probably need to contact them and try to work out some deals were you can pay them off in instalments over a period of time that is manageable. If you’re already paying instalments then they might need adjusting so you can handle them more easily.

Your budget should have the details of all of your outstanding debts and the amounts that you should be paying, along with all your other expenses. With this information you can work out accurately how much you can afford to pay and then present that to your creditors to see if they are happy to allow payments at a reduced rate if necessary.

Expect them to try to pressure you into higher payments but if you let them know that your budget only allows for a specific amount to be paid per period then more often than not they will agree to it knowing that the debt will get cleared in that manner, rather than forcing you to make payments you can not afford and face the risk of you not paying at all.

Sometimes it is necessary to borrow more money to pay off your existing debt and while you will be reluctant to borrow more money it can be beneficial where consolidation of debt reduces costs in the form of penalties and interest. You should only borrow if you can find money at a lower interest rate than the debt that is currently owed. Borrowing at a higher rate will only worsen your situation over time.

You can also get help from good credit counseling agencies that will help you to prepare a budget and negotiate with your creditors to reduce payments. Try www.cccs.co.uk in the UK or www.nfcc.org in the US.

Often they will give you other advice that will help with the management of your finances and will be invaluable to helping you improve your financial position.

And finally if worst comes to worse and you really can’t afford to pay off the excessive amount of debt that you have built up there might be no alternative but to file for bankruptcy. You will need some professional advice as to when and how to do this as it can make the difference between eliminating your debt completely or alternatively giving you three to five years to pay off what is owed.