How to Manage Business Debt

While debt can be a valuable tool for strategic growth, it requires careful management when it arises. As a company director, you are responsible for steering your organisation through periods of prosperity and financial strain.

This comprehensive guide will equip you with the knowledge and strategies to effectively manage your business debt. Through the following sections, you will gain valuable insights into:

• Recognising the early warning signs
• Taking proactive steps to address financial challenges
• Making informed decisions to safeguard your company’s future

How do I Reduce or Get Rid of Business Debt?

The first step in managing your business debt is to thoroughly understand 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

Your first step in managing debt is to create a comprehensive list of all your company’s financial obligations. This should include:

• Bank loans
• Credit card balances
• Overdrafts
• Finance agreements
• Supplier debts
• HMRC liabilities
• Any other borrowed funds

Categorise your debts into short-term and long-term liabilities, prioritising based on interest rates and their level of urgency.

Fixed-rate loans offer predictable repayments, while variable-rate debts, such as some credit cards, can lead to unexpected increases in monthly outgoings.

Pay close attention to any debts secured against assets. Failing to meet these repayments could put your business assets at risk. Consider personal guarantee insurance if you haven’t already.

Once you’ve prioritised your debts, it’s time to focus on improving your overall financial health

(2) Adopt Strategies to Improve Cashflow

Improving cash flow is essential for businesses managing debt. Positive cash flow ensures you can make debt payments without increasing liabilities. Here are some practical steps to enhance your cash flow:

• Review receivables: Speed up payment collection through early payment discounts or penalties for late payments
• Manage inventory: Minimise excess stock to free up cash tied in unsold goods
• Cut expenses: Identify areas to reduce costs without impacting operations
• Boost revenue: Look for opportunities to increase income through pricing, market expansion, or new products
• Consider leasing: Lease equipment rather than buying to keep cash in the business
• Explore asset finance: Use valuable assets as collateral to access cash quickly

Remember, each business has unique opportunities and challenges. Tailor these strategies to your specific situation. Be mindful that some actions, like delaying payments to suppliers or HMRC, can have serious consequences and may indicate deeper financial distress.

For critical public sector contracts, be aware that your financial health may be monitored by your clients. Open communication about any challenges you’re facing can help maintain trust and potentially lead to more flexible arrangements.

With improved cash flow, you’re in a better position to engage with your creditors.

(3) Communicate with Creditors

Here’s how to approach communication with creditors:

• Initiate contact early if you anticipate repayment difficulties
• Be transparent about what’s happening
• Negotiate for flexible payment terms, such as extended periods or lower interest rates
• Keep detailed records of all interactions
• Consider seeking help from a financial advisor or insolvency practitioner for large debts

Remember, failing to communicate can lead to serious consequences. Creditors may pursue County Court Judgments (CCJs) or even attempt to wind up your company.

(4) Explore Additional Funding Options

If improving internal cash flow isn’t sufficient to manage your business debt, you may need to explore external funding options. However, be aware that accessing additional funding can be challenging for businesses already in financial distress. Here are some potential sources to consider:

• Business loans: Traditional bank loans can offer structured repayment plans, but banks may be reluctant to lend to highly indebted businesses. Your existing lenders may be willing to renegotiate terms if you have a credible turnaround plan.
• Government schemes: Some government initiatives provide funding or support, particularly for businesses in specific sectors or regions. Be cautious of potential subsidy control implications when seeking government support.
• Investor funding: For businesses with strong growth potential, equity investment might be an option. This could involve diluting existing shareholders’ ownership.
• Debt for equity swap: In some cases, lenders may agree to convert some debt into equity, reducing your debt burden but changing the ownership structure.
• Asset sales: Selling non-core assets or business units can raise cash to repay debts or meet future obligations.
• Crowdfunding or peer-to-peer lending: These alternatives might be options for smaller capital needs, but carefully consider the terms and your ability to repay.

Before pursuing any funding option, carefully assess your business’s viability and ability to service additional debt. If your business is approaching insolvency, some funding options may not be appropriate or available. In such cases, consider seeking advice from an insolvency practitioner to explore options like Company Voluntary Arrangements (CVAs) or administration.

Remember, directors are legally obligated to act in creditors’ best interests when a company is in financial distress. Any new funding should be part of a broader strategy to manage and reduce debt, not just a short-term fix.

(5) Restructure Business Debt

Debt restructuring can offer a lifeline to businesses struggling with financial obligations. Here’s how to approach it:

1. Assess current agreements: Review all existing debts, including amounts owed, interest rates, repayment terms, and any penalties.
2. Prioritise debts: Identify high-interest debts and those with the strictest repayment terms.
3. Negotiate with lenders: Approach creditors to discuss adjusting repayment terms. Be prepared with detailed financial information and a solid repayment plan.
4. Consider consolidation: Merging multiple debts into a single loan with better terms can simplify payments and reduce monthly outgoings. Compare options carefully.
5. Explore formal arrangements: A Company Voluntary Arrangement (CVA) can allow you to agree on fixed repayments to creditors over time, potentially writing off a portion of the debt.
6. Debt-for-equity option: In some cases, offering lenders ownership stakes in exchange for reducing or forgiving debt might be viable.

Remember, restructuring is complex and can have significant implications for your business’s future. Always seek professional advice from a financial advisor or a licensed insolvency practitioner such as ourselves before proceeding.

(6) Seek Professional Financial Advice for Business Debt

When your business is grappling with debt, seeking professional financial advice early is crucial. A financial advisor or accountant can provide valuable insights, while a licensed insolvency practitioner can offer a balanced perspective if you’re insolvent.

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

• In-depth analysis: Identify debt causes and potential legal or tax issues
• Objective perspective: Aid in sound financial decision-making
• Expert negotiation: Secure favourable terms with creditors, potentially reducing payments
• Long-term planning: Resolve current debt issues and prevent future ones

When selecting a financial advisor, look for someone with experience in your industry. Ensure they are qualified and licensed. Professional advice can be the difference between struggling with debt and finding a path to stability.

Professional advice can help you explore options like Company Voluntary Arrangements (CVAs) or administration if necessary. It can also guide you through complex areas such as employee rights and pension obligations during financial restructuring.

(7) Involve Your Team in Debt Resolution

Managing serious debt often requires the collective effort of the entire leadership team. Their expertise, insights and support can be invaluable in assessing the situation and executing a plan to address it.

Here’s how to engage your team in this process:

• Leverage expertise: Have your finance team focus on the numbers while sales leaders concentrate on revenue strategies
• Assign clear roles: Delegate specific tasks such as negotiating with creditors, finding new revenue opportunities or cutting costs
• Encourage open dialogue: Create a blame-free environment to foster creative solutions
• Set regular review meetings: Update strategies and maintain focus on debt reduction
• Create a supportive culture: Emphasise the importance of each team member’s role in the company’s financial health

By involving your leadership team, you’ll ensure that managing debt is integrated into your overall business strategy, rather than being treated as an isolated financial problem.

As John Cotter, Professor of Leadership at Harvard Business School, notes: “Leadership is about coping with change. More change always demands more leadership.

(8) The Role of an Insolvency Practitioner in Debt Management

When your business faces serious debt issues you can’t resolve internally, it’s time to consider engaging an insolvency practitioner (IP). We are licensed professionals specialising in financial distress and insolvency, offering crucial expertise when you need it most.

An IP can provide a detailed assessment of your company’s financial position and advise on options like restructuring, refinancing, or formal insolvency procedures. If your business is insolvent, we’ll guide you through processes such as administration, liquidation, or Company Voluntary Arrangements.

One of an IP’s key strengths is negotiating with creditors. We can often secure more favourable repayment terms or even reduce your overall debt burden.

If you need to sell assets to repay creditors, an IP will manage this process fairly. And if your business can’t be saved, we’ll oversee its orderly closure, fulfilling all legal obligations.

Don’t wait until it’s too late. If you suspect your business might struggle to pay its debts, consult an IP early. The sooner you act, the more options you’ll have, potentially leading to better outcomes for your business and creditors.

(9) Legal Considerations in Managing Debt

As a UK business owner, you’ll need to navigate several legal considerations when managing debt. Understanding these can help you protect yourself and your company from serious consequences. Here’s what you need to know:

Recognising insolvency:

• Keep a close eye on your ability to pay debts as they fall due
• If you can’t pay debts or your liabilities exceed assets, you may be insolvent
• In this case, you must stop trading immediately to avoid personal liability

Understanding your duties as a director:

• When your company is in financial distress, your focus must shift
• You’ll need to prioritise creditors’ interests over the company’s success
• Failing to do so could lead to disqualification or even criminal charges

Managing finances responsibly:

• Keep your financial records accurate and up-to-date
• Be aware of the legal order for paying debts
• Prioritise secured debts, employee wages, and certain taxes over unsecured debts

FAQs on Managing Business Debt