How to Plan for the Future When Facing Debt
If your business is facing debt, planning for the future can help you recover your financial footing. The problem is that financial decline can occur very quickly and unexpectedly, and sometimes for reasons outside of your control.
A slump in the economy or a change in your market, for example, may cause financial distress. So how do you plan for the future when your business is facing serious debt?
Understand your priority payments
Priority debts are those that have the most significant consequences if you do not pay. Depending on the way you run your business, they might include:
· Business mortgage: your business premises may be repossessed
· Secured business loan: the asset on which the loan is secured will be repossessed
· Commercial rent arrears: you may be evicted from your business premises
Other priority debts include HMRC arrears, business rates, and outstanding utility bills, but in all cases, it is vital to contact your creditors at an early stage. If possible, you could offer a token payment to show that you are not deliberately avoiding payment.
Focus on cash flow
Positive cash flow is crucial to staying afloat because if you cannot pay your bills as they fall due you may be insolvent. This means placing a focus on cash preservation by collecting your own debts effectively and also cutting costs.
It is worthwhile checking the outstanding amounts that are due to the business and contacting the relevant debtors by phone to encourage payment. You may even decide to offer a small discount for fast payment, which could relieve some of the immediate pressure on your finances.
Cutting expenditure is also important and you may be able to reduce your outgoings simply by shopping around. You only need to cut each cost by a small percentage to obtain a significant reduction in overall expenditures.
Consider debt consolidation
If your business has several unsecured loans it may be worth consolidating them into one longer-term loan if you can access a lower interest rate. This means you would only have one loan repayment each month, which would release cash for other creditors.
Alternatively, if you only have one business loan you could refinance it to obtain a lower monthly repayment or a longer term. Before going ahead with consolidation or refinancing, however, it is important to check for any early payment penalties on the original loan and the new lender’s fees to make sure that the move is financially beneficial.
Company Voluntary Arrangement (CVA)
Although an official insolvency procedure, a Company Voluntary Arrangement helps you stay in business by formally restructuring your debts. CVAs typically last for 3-5 years and allow you to trade your way out of financial difficulty whilst writing off an agreed proportion of your debts.
Healthy cash flow is the key to financial stability in business and is more important than profit. Without good cash flow, your business is unlikely to survive and debts will increase, so regularly projecting your cash needs is a good first step to regaining control.
Article written by Sharon McDougall of Scotland Debt Solutions, part of Begbies Traynor Group, is a DAS-approved Money Adviser with vast experience in providing debt advisory support to individuals in Scotland.
