Managing business debt is crucial for any company’s stability and growth. It involves understanding the nature of debts, communicating openly with creditors, and making informed decisions to keep the business financially healthy.

My guide aims to provide directors with practical steps to tackle business debt head-on.

How-to-Manage-Business-Debt

How do I Reduce or Get Rid of Business Debt?

The first step in managing your business debt is to gain a thorough understanding of what you owe. This means not just knowing the total amount but also being clear on the terms of each debt, the interest rates, repayment schedules, and any potential penalties for late or missed payments.

(1) Prioritise your repayments

Start by compiling a comprehensive list of all your business debts, including bank loans, credit card balances, overdrafts, finance agreements, money owed to suppliers, tax liabilities, and any other form of borrowed money. Once you have this information, categorise your debts into short-term and long-term liabilities.

It’s also important to understand the terms of each debt. Some debts, such as bank loans, may have a fixed interest rate, while others, like credit cards, can have variable rates, which could increase your repayment amounts unexpectedly.

If any debts are secured against assets, be aware that failing to meet repayments could put those assets at risk. Consider personal guarantee insurance if you haven’t already.

(2) Communicate with Creditors

Open and honest communication with your creditors is vital. Informing them of your financial situation and showing a willingness to settle your debts can lead to more favourable terms and prevent the relationship from souring.

Here’s how to approach communication with creditors:

  • Initiate early contact with creditors if you anticipate repayment difficulties.
  • Be transparent about your financial situation.
  • Negotiate for flexible payment terms, such as extended payment periods, lower interest rates, or a payment pause.
  • Keep detailed records of all interactions with creditors.
  • For large debts, consider seeking help from a financial advisor or solicitor.

(3) Involve Your Team in Debt Resolution

An effective debt management strategy often requires the collective effort of your leadership team. Their expertise, insights, and support can be invaluable in both assessing the debt situation and executing a plan to address it.

Here’s how you can engage your team in this process:

  • Utilise the expertise of different team members for diverse perspectives, with the finance team focusing on the numbers and sales leaders on revenue strategies.
  • Assign clear roles for debt management tasks like negotiating with creditors, finding new revenue opportunities, or cutting costs.
  • Encourage open dialogue in a blame-free environment for creative and effective financial solutions.
  • Set regular meetings to review progress, update strategies, and maintain focus on debt reduction.
  • Create a supportive culture emphasising the importance of each team member’s role in the company’s financial health.

By involving your leadership team, you can ensure that managing debt is integrated into your overall business strategy and not just seen as a financial problem to be dealt with in isolation.

(4) Seek Professional Financial Advice for Business Debt

If your business is struggling with debt, it is important to seek professional financial advice as soon as possible. A financial advisor or accountant can help you analyse your financial situation; if you’re insolvent, a licensed insolvency practitioner such as ourselves can offer a balanced perspective.

Here are some of the benefits of seeking professional financial advice for business debt:

  • Professional financial advisors offer in-depth analysis of your business’s finances, identifying debt causes and potential legal or tax issues.
  • They provide an objective perspective, aiding in sound financial decision-making.
  • Experienced in negotiation, they can secure favourable terms with creditors, potentially reducing payments and interest rates or eliminating some debt.
  • Advisors assist in long-term financial planning to resolve current debt issues and prevent future ones.

When choosing a professional financial advisor, it is important to find someone who has experience working with businesses in your industry. You should also make sure that the advisor is qualified and licensed.

(5) Adopt Strategies to Improve Cashflow

Improving cash flow is essential for businesses with debt. Positive cash flow ensures that businesses have the funds available to make debt payments without increasing liabilities. Here are some practical steps to enhance cash flow:

  • Review and manage receivables. Speeding up payment collection can significantly improve cash flow. Businesses can consider offering discounts for early payment, enforcing penalties for late payments, or using invoice factoring services.
  • Manage inventory efficiently. Reducing costs by minimising excess stock and managing inventory more effectively can free up cash tied in unsold goods. Businesses can implement just-in-time inventory systems or other inventory management strategies to achieve this.
  • Cut unnecessary expenses. Examining current expenses to identify areas where costs can be reduced without impacting business operations can help improve cash flow. This may include renegotiating contracts with suppliers, reducing discretionary spending, or outsourcing certain tasks.
  • Increase sales revenue. Looking for opportunities to increase income, whether by raising prices, expanding the market, developing new products, or improving sales strategies, can help businesses improve cash flow and reduce debt.
  • Consider leasing instead of buying. Leasing equipment rather than purchasing it can keep cash in the business. While this might lead to higher costs in the long term, it can provide the breathing space businesses with debt need right now.
  • Explore asset finance options. If businesses own valuable assets, asset financing can be a way to access cash quickly, using these assets as collateral.

Each business has different opportunities and challenges when it comes to improving cash flow, so it is important to tailor these strategies to the specific situation.

(6) Explore Additional Funding Options

If improving internal cash flow is not enough to manage your business debt, you may need to explore external funding options. Here are some potential sources of additional funding for businesses with debt:

  • Business loans: Traditional bank loans can offer the capital you need, often with structured repayment plans tailored to your business’s cash flow. However, banks may be reluctant to lend to businesses with high debt levels.
  • Government grants and schemes: There are a number of government grants and schemes that can provide funding to businesses, especially those in specific industries or geographic locations. Many of these grants and schemes do not require repayment.
  • Investor funding: If your business has strong growth potential, you may be able to attract investors who are willing to provide capital in exchange for equity. This can be a good option for businesses that need to raise a significant amount of capital, but it is important to be aware that investors will expect a return on their investment.
  • Crowdfunding: Crowdfunding platforms allow businesses to raise money from a large number of people, typically in exchange for product discounts or other incentives. This can be a good option for businesses that have a loyal customer base or that are launching a new product or service.
  • Peer-to-peer lending: Peer-to-peer lending platforms allow businesses to borrow money directly from individuals. This can be a good option for businesses that need to raise a smaller amount of capital or that do not qualify for a traditional bank loan.
  • Merchant cash advances: Merchant cash advances allow businesses to borrow money against their future credit card sales. This is a relatively quick and easy way to access cash, but it can be expensive and should only be used as a last resort.

It is important to note that all of these funding options have advantages and disadvantages. Before choosing a funding source, it is important to carefully consider your needs and options.

(7) Restructure Business Debt

Debt restructuring is a complex process that can help businesses facing financial difficulties improve cash flow and stay in operation. Before attempting to restructure business debt, it is important to seek professional advice from a financial advisor or insolvency practitioner.

Steps to consider when restructuring business debt:

  1. Assess your current debt agreements. Understand the terms of your existing debts, including the amount owed, interest rate, repayment terms, and penalties or fees.
  2. Prioritise your debts. Identify your highest-interest debts and those with the most stringent repayment terms.
  3. Contact your lenders. Discuss the possibility of adjusting your repayment terms. Be prepared to provide detailed financial information and a plan for how you will repay your debt.
  4. Consider consolidating your debts. Consolidating multiple debts into one loan with a lower interest rate can simplify payments and reduce monthly outgoings. However, carefully compare the terms of different consolidation loans before making a decision.

Other options to consider when restructuring business debt include:

  • Converting debt to equity: This involves offering your lenders ownership in the business in exchange for reducing or forgiving debt.
  • Entering into a formal arrangement like a CVA: This is a legal process that allows businesses to agree on a fixed amount of repayment to creditors over time for a percentage of debts. The rest can be written off.

The Role of an Insolvency Practitioner in Debt Management

An insolvency practitioner (IP) is a licensed professional who specialises in dealing with financial distress and insolvency. Engaging with an IP can be an important step for businesses facing serious debt issues that cannot be resolved through internal measures.

Here is how an IP can assist your business:

  • Debt Assessment and Advice: An IP can provide a detailed assessment of your company’s financial position and offer expert advice on the available options, such as restructuring, refinancing, or insolvency procedures.
  • Formal Insolvency Procedures: If your business is insolvent and cannot pay its debts, an IP can guide you through formal procedures such as administration, liquidation, or Company Voluntary Arrangements (CVAs).
  • Negotiations with Creditors: IPs are skilled in negotiating with creditors and can often achieve more favourable terms for debt repayment, or even agree on a settlement that reduces the overall debt burden.
  • Legal Compliance: An IP ensures that any insolvency process is carried out in accordance with legal requirements, protecting the directors from potential legal consequences of wrongful trading.
  • Asset Management: In cases where assets need to be sold to repay creditors, an IP can manage the sale process, ensuring that assets are sold for a fair price and that the proceeds are distributed appropriately.
  • Closure and Dissolution: If a business cannot be saved, an IP can oversee the orderly winding up and dissolution of the company, ensuring that all legal obligations are met.

It’s important to consult an IP as soon as you realise that your business may not be able to pay its debts. Early intervention can often result in a wider range of options being available and potentially a better outcome for the business and its creditors.

Legal Considerations in Managing Debt

When managing business debt in the UK, directors must prioritise understanding and complying with relevant laws to minimise personal liability and achieve the best possible outcomes for the company and its creditors. Key considerations include:

  1. Insolvency: Directors must cease trading if the company is insolvent (unable to pay debts when due or liabilities exceed assets). Failure to do so can lead to personal liability for wrongful trading. Seek advice from a licensed insolvency practitioner if insolvency is likely.
  2. Directors’ duties: Directors must promote the company’s success and exercise reasonable care, skill, and diligence. In financial distress, the duty shifts to prioritising creditors’ interests. Breach of these duties can lead to personal liability, disqualification, or criminal charges.
  3. Contract compliance: Review debt agreements to ensure debt management actions, like restructuring or prioritising payments, do not breach contract terms, as this could trigger default or legal action.
  4. Debt prioritisation: Pay debts in the legally required order. Secured debts, employee wages, and certain tax debts rank higher than unsecured debts. Prioritise accordingly to avoid legal consequences.
  5. Record-keeping: Maintain accurate, up-to-date financial records, including those related to debt. Failure to do so can lead to legal presumptions against directors in insolvency proceedings.
  6. Tax debts: Engage with HMRC early if you foresee difficulties paying tax debts. They can offer Time to Pay arrangements but also have strong powers to recover unpaid taxes, including personal liability for directors.
  7. Creditor communication: Address any legal disputes with creditors promptly and professionally. Seek legal advice, respond to correspondence, attend court hearings, and negotiate in good faith to avoid escalation.

Proactively addressing these legal aspects and seeking timely professional advice can help directors navigate debt challenges more effectively while minimising legal risks to themselves and their companies.

FAQs on Managing Business Debt

If your company is having difficulty paying debts, take proactive steps like creating a cash flow forecast, cutting unnecessary costs, and communicating with creditors to negotiate payment plans or restructure debt. If insolvency seems likely, seek advice from a licensed insolvency practitioner immediately.

Generally, directors are not personally liable for company debts. However, you may be held liable if you breach your directors’ duties, engage in wrongful or fraudulent trading, or provide personal guarantees for company debts.

Directors have a duty to act in the best interests of the company and its creditors when the company is insolvent or approaching insolvency. This includes avoiding preferential treatment of certain creditors and not taking on further credit if insolvency is inevitable.

Contact HMRC as soon as possible if you anticipate difficulty paying tax debts. They may offer a Time to Pay arrangement allowing you to spread payments over a longer period. However, failing to pay tax debts can result in penalties and legal action.