Dealing with debt remains a serious problem for U.S. businesses, as evidenced by the number of bankruptcy filings made in 2005 that was higher than the previous four years. Experts say those businesses that aren't able to get a grip on their financial situation are sealing their own fate.

Debt often reaches a critical mass for small business owners because many of them are frequently funding the business with home equity loans and credit cards.

"Those rates can be outrageous so the number one priority is getting the debt down to a manageable level," said Charles (Chic) Hilliker, direct manager of Fiducial's seven offices in Indiana.

Spotting the danger signs of debt is the key to start turning around a company's fiscal fortunes.

One of the most prevalent danger signs, Hilliker said, is when you have to borrow from somewhere else to make repayments because the business is not generating the cash it needs. This often occurs in start-ups where fledgling business owners do not do an accurate job of forecasting their cash needs for running the company.

"Maybe they didn't figure on having accounts receivables lagging, but all of a sudden they have to make payments on debt and there's no money to do it," he said.

Perhaps the biggest thing entrepreneurs can do to get back into the black is getting a good handle on their cash flow and recognizing there's a tremendous difference between that and their profit and loss statement.

"They have to make certain they've got adequate cash to make debt payments," he said. "That's when they need somebody who can offer them good advice and steer them into the right direction."

In his 25 years of public accounting, Hilliker has seen the same situation time and time again where the business owner is in denial about the company's financial shape.

"They refuse to recognize some of the danger signs," he said. "They've got to borrow more money to pay off what they owe."

Even after some clients are confronted with the bad news, they refuse to heed advice. Hilliker said he's had clients go both ways with those that ignored his advice filing for bankruptcy.

Doing what they do best

After having built a successful business, many owners withdraw from the mainstream of the business and as a result, the operation often goes into debt because it was their vision, talent and perseverance that built up the company to begin with.

"They've got to get reconnected to their company and pay attention to details," said Frank Rosenbaum, Fiducial's director of national accounts. "They need to look at how the company has evolved and look at the areas of financial bottlenecks that are costing a lot of money but are not easy to find."

Generally, a small business owner that has a certain forte, such as sales, builds a company based on that forte. But when the company grows to a certain level they think they can stop selling and spend more time answering phone calls. That's a mistake, Rosenbaum said, because owners should realize that they built the company on their ability and it doesn't do them a darn bit of good sitting in the office.

"They need to hire an administrative staff to handle things on a day-to-day basis that need to get done," he said. "The owner, meanwhile, needs to continue to do what they do best."

For example, Rosenbaum noted that a large printing brokerage was owned by five principals who were all high-level sales people. They built the organization based on their unique talents, but after taking it to a certain plateau, they began working on internal matters instead of continuing to sell. All of a sudden their sales fell off, and their ability to grow salespeople stopped cold.

Getting back to basics

Rosenbaum told the principals to get back to basics and resume being high- powered salespeople, which made the difference.

"They did that and hired a professional administrator -- and boy things around," he said.

According to Rosenbaum, debt is the biggest problem currently facing small businesses.

"Any business you talk to today has a financing issue -- whether to finance that new truck or putting up a new plant," he said. "There's a huge amount of debt issues with small businesses that we look at. Before you spend your money, determine the return on investment (ROI) and cash flow to see if it meets your target. If it doesn't, then it's time to pull in the reins a little until it's financially feasible."

The trouble is that most owners don't look at the ROI and analyze it, which Rosenbaum said is vital since their ROI has to be fairly high -- in the 30 percent range minimum -- due to the risk. If owners go in with a low ROI, then they probably won't be successful. He advises utilizing outside financing very carefully to make sure the cash flow is there.

"You've got to make sure that the market's going to buy what you're offering," he said.

A pink elephant in the corner

Dealing with debt before it gets out of control is a huge dilemma for small business owners, according to Gene Polley, a senior business advisor in Fiducial's San Diego office.

"They get to a position where their debt servicing is a major portion of their expenses, especially if they've used the wrong kind of debt, such as a credit card, in making large payments," said Polley. "They're not even cutting into the debt because interest rates are so onerous at 18 to 20 percent. If you start getting a substantial debt in credit cards it can sink your business."

If debt gets out of control, refinancing your house is an option, but Polley cautioned that you've got to have the discipline not to run the debt back up, otherwise all you've done is invested equity into the house from the business.

"It's okay if that's what they intended to do, but if they're just buying inventory for the business, it's a losing proposition," he said.

Polley has a number of clients who have exactly the same problem: they're not making enough money to pay down their debt. They need help in getting it restructured at a reasonable interest rate. He points them to lenders that he thinks are more appropriate for their circumstances.

For companies in debt that are trying to fight their way back, Polley said they need to stop the bleeding and start paying it down. As part of a mid-year counseling session, he meets with clients in May and June and advises them if their debt load is too high for their business. In a number of instances he finds that the debt is personal and has been put on a business credit card, so he looks at what the owner has been buying.

Although he constantly points out that clients are in debt and they need to do something to improve the situation, Polley observes that many owners still treat the issue as if it were "a pink elephant in the corner that the owner doesn't want to think or talk about. But it's lurking there."

STEPHEN PAREZO is the Media Manager for Fiducial.