Many factors will cause a business to rack up debt. Fast growth, poor management, falling customer demand, rising expenses, bad financial decisions and external influences are just a few.
While every owner hopes that mounting debts won’t happen to them, there is no point burying your head in the sand if it does. Taking swift action will allow you to cut your losses, prevent debt from mounting further, and minimise the impact on your personal life. It should, if carried out early enough, give you a chance of recovery.
If you find yourself with mounting debt that you can’t pay off, you may wonder what to do next. We’ve listed some steps to take.
- Uncover the extent of your debt
- Speak to your creditors
- Minimise costs
- Audit your financial health
- Work with an expert
- Utilise external finance responsibly
- File for insolvency
Uncover the extent of your debt
The first step to overcoming debt is understanding the extent of it. Take time to work out how much money is owed and to whom. Certain types of debt are more urgent than others (for example, taxes and loan repayments), so knowing who you owe will allow you to prioritise your repayments.
Once you grasp your debt, it will be simpler to make an effective plan of action to tackle it.
Speak to your creditors
Next, you need to speak to the creditors to whom you owe the money. While telling someone you haven’t got the money you owe them may be nerve-wracking, it’s crucial to manage expectations.
In most cases, you should be able to negotiate payment plans and the like, whilst managing your cashflow carefully or liquidating assets to clear the balance.
In any scenario, communicating with your creditors will reduce the fear of them chasing you for debt, allowing you to be proactive and come to a resolution – or at least know the next step.
Minimise costs
If your business is already in debt, the last thing you need is more expenditure, especially if you do not have sufficient cash flow to manage the existing cost base. It could lead to more debt if you default on payments.
Aim to reduce your costs, so you only pay for what you absolutely need, even if it’s temporary. This will allow you to minimise the money going out from your company, so you focus on addressing your debt instead.
Audit your financial health
It’s essential to understand how you ended up in debt. Auditing your company’s financial health will uncover the root cause of your problems.
Typical signs to look out for include:
- Reduced cash flow
- Falling sales
- Increasing costs
- Shrinking profit margins
Spend time reviewing your accounts to look for these signs and when they began. This should lead you to the underlying issues, making it easier to rectify and prevent further issues later.
Work with an expert
Dealing with debt is hard by yourself. Many owners cannot see the wood for the trees, leaving them at a loss when identifying their issues and creating an effective resolution.
Working with a business advisor is a lifeline. They will spend time understanding the problems in your company before designing a plan to move forward – either through a turnaround strategy or closing the business. They will offer a neutral voice to the process while guiding you with their expertise.
Alternatively, reach out to local institutions, charities or industry bodies to see what support is available for businesses struggling with debt.
Utilise external finance responsibly
When in debt, you often need an injection of capital to maintain positive cash flow and empower you to repay your creditors. External finance could provide the boost you need.
However, tread carefully. If you haven’t dealt with the underlying problem, then taking on a loan will potentially exasperate the problem. Don’t fall into the trap of taking out external finance to pay off your existing debts, as this often ends in a spiral you can’t get out of and worsens the problem.
If you are using external finance, be sure you can afford it and that it’s the right choice.
There are alternative options for external finance, including equity funding. They have specific criteria you need to fulfil to be successful in securing finance, so be aware of these and ensure your business meets the requirements.
If you aren’t sure what the best route is, speak to a business advisor or commercial finance broker to find out more.
File for insolvency
When a business becomes insolvent, this means that its debts or liabilities are greater than the value of its assets and income. They’re not able to pay back the money owed, either currently or in the future.
If this is where you are, your only options are to arrange
- A company voluntary arrangement (CVA) if there is a good underlying business and creditors will approve such a measure; or
- The liquidation of the business.
An insolvency practitioner (IP) will be required in either case. In a CVA, the company will typically arrange to pay back a proportion of the debt back over a 5-year period, which could be preferable to creditors that the business going into liquidation.
In a liquidation, the IP will take over the company and determine whether it is best in the interests of the creditors to sell the assets or business as a going concern to generate income for the liquidation.
Conclusion
If your company has debts that you can’t pay, it’s a scary time. While the temptation may be to panic or avoid the problem entirely, it is much more beneficial to be proactive. Start by recognising the debt and learning what your options are.
Fortunately, there are solutions available, depending on the extent of your debt and the nature of your company. You need to find the best outcome for your business, even if it’s not necessarily the one you wanted.
Working with an advisor is crucial to finding an option that addresses your debt effectively. Doing so will lift a weight off your shoulders while giving the business a chance to survive.
If you have financial concerns about your business, including debt, and need guidance, we can help you find the best route forward.