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How To Reduce Small Business Debt

There can be no doubt that the last few years have been very challenging for small businesses. Whether it has been the effects and aftermath of the Covid-19 pandemic, the political turmoil, or the cost-of-living crisis, smaller companies have faced unprecedented change alongside shifting markets. Those companies that have survived have undoubtedly had to adapt, and this hasn’t always been in ways that they would have chosen.

Indeed, in order to make their finances work, many small businesses had to take on a significant amount of debt during challenging times. It has been estimated that a third of small businesses are now in a significant amount of debt (more than 10 times their cash in the bank). And that number has risen from 14% of small businesses before Covid-19.

Taking on debt can sometimes be an essential tool for a company and shouldn’t be seen entirely as a negative - but certainly accumulating a significant amount of debt can only cause problems for a business in the medium and long term. For smaller businesses to thrive, they must get a handle on their debt challenges.

In this article, we provide advice and guidance on just what small companies can do if they have found themselves with a significant amount of debt.

Assess the situation

Any time a business gets into debt, there needs to first be a period of reflection and understanding before the situation can be dealt with. There’s no use putting in a range of measures to cut debt if you are only going to accumulate it all over again a couple of months later. Ultimately, you need to understand the root cause of the problem to be able to manage a debt issue effectively.

It may well be the case that in this instance, debt was unavoidable due to the range of challenges in recent years - but consider if this was definitely the problem. Remember, the reason for debt accumulation will be different for every business, and understanding why you have got yourself into this situation is a major step towards putting things right.
It is a great idea, then, to work directly with accountants who are experienced in assisting businesses like yours. Unbiased accountants can look at the business finances with fresh eyes and help you to see clearly why debt has built up - they may even be able to provide personalised advice as to your next steps.

Improve your cash flow

It is often the case that small businesses get into debt not because they don’t have enough money coming in, but because they don’t have that money coming in at the right time. This is a cash flow problem. Clearly, one of the best ways to improve an issue with cash flow is to make more sales - but actually, the issue is usually a little more complicated.

In the early days of any business, your outgoings are always likely to be high. After all, you are having to take on a number of costs as you attempt to establish yourself in the market. This will involve investing in your products or services, finding the right balance of staff, and figuring out other complex issues like marketing and customer service. If you want to improve your cash flow issues, you need to focus on forecasting.

“Without forecasting a company’s cashflow, it would be almost impossible to estimate how much cash your company will have at a given time,” says Sadie Channing, Director at Menzies. “Likewise, if you add to this wages, payroll taxes, VAT, corporation tax payments, loan repayments and other overheads, the situation can become even more complicated.”

Consolidate your debt

Debt consolidation involves taking out a single loan to pay off multiple debts. This can be a good option for SMEs with several high-interest loans or credit cards, as it simplifies repayments and can result in lower overall interest rates. The idea is to combine all outstanding debts into a single loan, typically at a lower interest rate, and with a longer repayment term.

To consolidate business debts, you’ll need to apply for a loan that covers the total amount owed. This may be through a traditional bank loan or through a specialist debt consolidation lender. If you have a good credit score and a solid business plan, you may be able to secure a loan with a lower interest rate and more favourable repayment terms.

Once the loan is approved, the funds are used to pay off all outstanding debts, leaving only the new consolidation loan to be repaid. This can simplify the debt repayment process and make it easier to manage cash flow. However, it's important to note that debt consolidation may not always be the best solution, especially if the interest rate on the new loan is not lower than the existing debts. It's important to consider all options and seek professional advice before committing to any debt consolidation plan.

Cut your costs

Cost-cutting measures aren’t something any business wants to do - but they can be an essential way to reduce outgoings and free up cash flow. There are a number of areas where cost-cutting measures can be implemented, including utilities, supplies, and personnel expenses.

One of the first places to start is with an analysis of your current expenses. Take a close look at all of your expenses, both fixed and variable, and identify areas where you can cut back. For example, could you reduce your energy usage or switch to a more cost-effective supplier? Are you overstocked on supplies that are not currently being used? Are you paying for services that you don't really need? By trimming these expenses, you can start to reduce your overall debt.

Another area to consider is personnel expenses. This might involve reducing staff hours, renegotiating salaries, or outsourcing certain functions to cut down on the costs associated with employing full-time staff. It's important to approach this with caution, however, as it's crucial to maintain staff morale and productivity.

Ultimately, every small business is different so it is vital that you understand why you found yourself in debt and that you approach the situation from there. Many of the measures suggested in this article can be good business practices in any case, but the crucial element for you is establishing the root cause of your debt and then dealing with it.

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