Borrowing money is part of the life cycle of a business, and smaller companies will almost certainly need to rely on external funding as part of their business model. But this doesn’t mean that all debt is good debt.
As a rule, businesses shouldn’t have more than 30% of their business capital in credit debt. Of course, the exact ratio will depend on your company, but the 30% figure gives a good indication of how to measure the health of your business. If you have too much debt then you may struggle to borrow more, or run into difficulties making payments.
Prioritising your debts
Just as individuals are encouraged to pay the most important debts first, business owners should prioritise their payments to make sure essential costs are covered. Prioritising debts is typically done by considering the consequences of missing a payment:
- Mortgage or rent for your premises – if you don’t pay this, the building could be repossessed
- Business rates and taxes – unpaid bills could lead to bailiffs at the door or court action
- Electricity, water and other utilities – your supplies could be cut off, impeding your ability to do business
- Business hire purchases or leased equipment – the items could be repossessed
- Major suppliers – if you lose essential supplies then you could put the future of your business at risk
- Overdrafts and loans – missing key financial payments could damage your relationship with you bank and make it difficult to borrow money in the future.
You may be able to negotiate some of these payments, cut down on unnecessary expenses (for instance by downsizing your premises), or work out a payment plan.
Getting help: Business Debtline
If you work through your priority payments and don’t think you can stay on top of them, it’s time to get some external support. Business Debtline is a charity set up by the Money Advice Trust. They have been running for the past 20 years, with the explicit purpose of providing free advice to small businesses and self-employed individuals struggling with debt.
They offer a range of resources, including fact sheets and sample letters that you can use if you need to contact your creditors. You can also contact them directly for individual advice.
Getting professional advice: Solicitors and Insolvency Practitioners
Speaking to Business Debtline is a good first step, and might be enough to put you back on top of your business debts. However, if you find yourself in further difficulty then you could also reach out to a debt professional. For instance, if your creditors decide to get a court judgement against you or make a statutory demand for payment, it may be a good time to get further advice. You can use the Insolvency Practitioner Directory to find somebody to speak to. Professionals will charge for their services, but they will also be able to dedicate more time to looking through your finances.
Always take action
Many successful business professionals have bounced back from earlier difficulties – so struggling with your business debt is nothing to be ashamed of. However, it’s important that you recognise the problem as quickly as possible and take steps to resolve it. Whether that means renegotiating your debts, cutting your business expenses or getting expert advice, the important thing is to take action to resolve any problems. This will help to get you into better financial shape for the future.