How to Reduce Small Business Debt

debt unchained - How to reduce small business debtThe joy of being an entrepreneur is all-engrossing. The journey is tough, the road paved with enemies and obstacles, but ultimately the rewards are plentiful.

Or are they?

Quitting your day job to pursue a dream – or perhaps a dream income – takes its toll emotionally and energetically. You have a solid business plan, plenty of interest, and perhaps even plenty of revenue, but the pressure never subsides – not for an instant.

You realise that to secure long term success, it’s not possible to simply coast along in moderation forever, and so for the purposes of growth you have taken the steps to acquire finance.

However, the inevitable by-product of acquired finance is of course acquired debt. Sure, the money you received enabled you to capitalise on certain growth opportunities, but the new revenues you’ve generated are being eaten up by repayments even before you’ve had a chance to count them.

No, the pressure never subsides, and all of a sudden the joys of being an entrepreneur are no longer quite as rewarding as you perhaps dreamed them to be.

If this scenario sounds familiar to you, then you may take some solace to learn that you are by no means alone. Indeed, taking on debt is a naturally high-risk endeavour, and something that an increasing amount of small businesses are shying away from at the resultant cost of their own growth.

Weak consumer demand, high operational costs, inadequate cash reserves, poor access to finance and inadequate management of cash flow are all cited in a report by the Economist Intelligence Unit as being amongst the top business threats that are currently piling on the financial pressures to small businesses up and down the country.

small business threats - How to reduce small business debt

(Image source: Adapting in tough times: The growing resilience of UK SMEs)

In efforts to combat these threats, the report cites that as many as 51% of struggling SME owners are working longer hours, and 37% are reducing prices for their customers – and meanwhile the debts are piling up.

How to Reduce Small Business Debt            

Acquiring debt is often a necessity for the continuation of a business. But, without an adequate plan in place to get your finances under control, mounting debts can just as easily spell its end. It needn’t be this way, and so we have taken the time to put together this blog post as a guide to reducing small business debt so that you can get back to doing what you love.

Acknowledgement and Quantification

First thing’s first – if you’re keeping the knowledge of your debts in the back of your mind, you need to bring it to the front immediately. Just as ignoring problems don’t solve them, ignoring debts don’t pay them – so it’s time to exercise acceptance before they mount up any more.

Once you’ve acknowledged the fact that you’re in a hole, you need to work out how deep it actually is. Arrange a meeting with your bookkeeper and put a figure on your total debt, as well as how it is set to grow over the coming months or even years.

From this, you may actually realise that your debts aren’t as big as you had imagined, and by creating a simple budget for your business, you will be able to climb your way back into the black relatively quickly.

Make a Plan that Facilitates Repayments

With the debts quantified, you will be able to work out exactly how much of your income you can allocate to paying them off, and from there work out how long it will take you to do so.

There are a number of tried and trusted spending plans to help small businesses reduce debt, any or all of which you may find useful. They include:

  • Allocating a specific percentage of your monthly income, no matter what you bring in, to paying off your debt.
  • A self-inflicted austerity measure, where you reduce your spending to essentials-only, and divert the savings into debt repayments.
  • Allocating income from a specific line or lines of products to making repayments.
  • Automating your debt repayments. It can be tempting to keep money in your account, and before you know it, it’s spent. Remove this temptation by automating the forwarding of a percentage of your revenue to the lender each time you receive a payment.

All of these strategies can help you, but it’s important that you understand your cash flow and by how much it varies from month to month in order for it to be effective. Furthermore, you must be disciplined in your budgeting – allocating certain lines of funds for debt repayments means just that. Don’t cheat yourself out of a successful future for your company.

Chase Payments

The late payments culture is one of the banes of the small business owner. Indeed, once you’ve got your finances in order, you may very well realise that you could pay off a significant proportion of your own debts if only the firms that owed you money would pay off theirs.

Late payments are becoming a big problem. Earlier this year, a report from This Is Money found that an increasing amount of small firms in the UK were having to turn to the courts to chase late payments, with the average amount being owed standing at £4,619.

“Almost £5,000 is a significant amount for any small business to have to go to court to chase and it is hugely unfair that a small business should have to spend its precious time and resources on chasing payment for work that has already been delivered,” said Martin Campbell of Ormsby Street.

“Late invoice payment is fast becoming the scourge of small business in the UK, causing cash-flow issues that can impact growth and even the very existence of a business,” he added.

However, an earlier study by automated credit control service Satago alarmingly found that, despite the fact that UK small businesses are collectively owed billions of pounds in late payments, 34% said that they write off thousands every year. Of these, 81% cited that they found the process of chasing late payments “uncomfortable”, and 19% were afraid of antagonising customers.

Jaime Hoyle, director of Monroe Diamond Drilling:

“When we do not receive payments on time we obviously cannot pay our suppliers on time, which not only gives us a bad reputation but also could put a black mark on our credit. Also we have 10 employees to pay weekly and as we are a small company only just starting out we do not have the backing to pay out money if we have not received payments ourselves.

“The worry of hassling the client and antagonising them is a big worry for us. We try to leave it as long as possible until we literally cannot work without overdue payments before contacting them about it as there is so much competition out there in our trade that we are concerned they will look elsewhere.”

As troubling and ‘uncomfortable’ as chasing late payments may be, in the world of business, your debts have to come first. You must chase all debts that are owed to you, especially if you are struggling to pay your own. Take the debtors to court, if necessary, though often the mere threat of legal action will be enough to see some movement. 

Negotiate with Suppliers

Of course, you may well be just as guilty of contributing to the late payments culture as anyone else. If you owe money to suppliers, but are struggling, you should reach out to them and try to extend the payment terms on any of your outstanding invoices, rather than ignoring the problem.

Also, when making new purchases, you should be trying to negotiate early payment discounts. All businesses are very much aware of the late payments problem, and many are willing to lower prices in return for early payments. If your suppliers don’t make this offer explicit, then it will be up to you to broach the subject and negotiate such a discount. The promise of regular new business plus early payment is a very attractive prospect, so it’s worth trying your luck.

Renegotiate Loan Terms

If you’ve taken a business loan, your relationship with that loan may change over time. The last thing that lenders want is for you to default on it, which means that if you are struggling, a simple phone call could lead to a restructuring of repayments and even a renegotiation of interest. Many lenders will be accommodating and flexible if there is genuine risk of default – pick up the phone.

Consolidate Your Debts

If your debts are numerous, then half the battle of repayments is organising who gets paid what and when. In addition, many loans or lots of credit card debt may amount to high interest. Debt consolidation in these circumstances may be the answer. It involves taking out one large loan to pay off smaller ones. Such loans are usually low interest, though often require collateral or personal guarantees that could amount to further risk.

Final Word

It’s quite natural and common for the small business owner to feel overwhelmed by debt. But the important thing is that the problem is addressed. Caught early, no hole should be too deep to escape with an organised strategy to guide you.  

Equally important, however, is to not let mounting debt crush your entrepreneurial drive. Organising your debt repayments is one thing, but you must also keep some of your focus on growth.

It goes without saying that the more cash you can generate, the easier it will be to pay off your loans and continue your march to prosperity. So, it will pay to keep diversifying your business and finding new products and new solutions that will increase your customer base and ultimately your turnover. You may also find room to raise your prices, so long as you can ensure the same amount of sales. Selling off a few surplus assets may also be an option – they’re surplus for a reason: you’re not using them. And, if necessary, you may need to consider working a second job whilst you get on top of your debts. It’s not an ideal scenario, but, if you have a plan in place it should only be temporary and for the greater, long-term good of your primary business.

Whatever it takes, don’t let your debts be the ruin of your business, for it’s invariably harder to start again from the bottom. Take control, make those phone calls, and strategize your pathway back into the black.

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