Editors note: this article is a departure from our usual topics, but we’re including it here for any of our UK readers who may be small business owners.
Too much debt can be the end of a small business. While some debt can be necessary to grow your company, allowing you to hire new employees or purchase new equipment, too much debt can seriously damage your cash flow.
But if your business debt has crept up on you, you’re not alone. In the UK, insolvency is on the rise. According to The Insolvency Service, insolvency rose in 2019 compared to 2018, demonstrating that a growing number of small businesses are falling into significant debt.
Here are some ways that you can start to dig yourself out of business debt and survive becoming insolvent.
Chase Up Late Payments
Late payments from your clients can be problematic for your cash flow. While some late payments might be unavoidable due to the kind of business you run, once you’ve submitted an invoice, you should try to ensure that your clients are being chased for payments regularly.
Catching up on your owed payments will help you raise the funds you need to get out of debt. Take a look at all of your outstanding invoices and start to contact the customers, giving them a polite nudge to pay up. For new clients, you might want to consider shortening your payment terms or adding a late-payment penalty to encourage swift payment of invoices.
Debt consolidation is when you transfer your debts into a single business loan. Although this won’t make your debts disappear, merging them all into one loan can reduce your monthly payments and outgoings and help you better manage your money. Rather than having to make lots of separate payments, it becomes much more manageable as it all goes to a single loan provider. Once you have an easier time of repaying your debts, you can start paying it off and pull your business out of trouble.
Negotiate with Creditors
If you find yourself unable to make debt repayments, you could contact your creditors directly and see if you can renegotiate terms. Your creditors might be open to accepting smaller amounts of re-payment each month rather than risk the business defaulting on the loan.
To start the process of negotiation, send your creditors a hardship letter outlining your issues. You should explain why you cannot pay back the loan, what attempts you have made to remedy the situation and explain why your situation is unresolvable. They may be willing to let you pay your debts over a longer period of time, or even accept less money than you owe. From their perspective, they would rather get back some of their money than none of it, so they may be open to negotiation.
Cut Down on Expenses
If possible, you should look at cutting costs in your business to help your cash flow. This can be difficult, and you may have to be ruthless, but it could be essential to saving your business from going under.
Start by reviewing your budget and all your outgoings. Pick out what you can completely do without and cut it off right away. Take a look at where spending could be reduced, like switching to a cheaper supplier. Moving your business operations into a smaller, more affordable location could save thousands in rent, but it can be an expensive initial investment. Discuss your options with your accountant and only continue to pay for the essentials.
Increase Your Income
Boosting your cash flow can help with your long-term business goals outside of debt management. Promote your business to increase your earnings with low-cost promotions like a limited-time sale or offering discounts. If you have a lot of stock, those items represent money that is tied up in your business and unable to pay down debt. By selling it off in a sale, you can quickly free up cash to help ease those debts. For more long-term revenue-boosting, you could set up an affiliate marketing programme, ask for referrals, use ads and much more.
Enter a Company Voluntary Arrangement
If your business becomes insolvent, you could consider a Company Voluntary Arrangement (CVA). This is an agreement between your business and your creditors that allows you to pay off your debts over a set amount of time, but that blocks any legal action from being taken against you.
A CVA can help improve your cash flow, halt the pressure from your creditors and stop the threat of a winding-up petition. Only a licensed Insolvency Practitioner can create the arrangement and begin the proposal after gathering all the necessary information. A CVA is just one of the solutions to business insolvency. But an Insolvency Practitioner will be able to talk you through your options if your debt becomes unmanageable.
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Image source: Mike Lawrence.