What are the causes of business debt?
The effects of business debt can be catastrophic; without finance to pay wages, purchase new inventory or repay debts, businesses cannot function as they should. This throws a spanner in the works when it comes to developing staff skills and product/service quality – something banks take into account before offering support. It takes just one instance of unpaid bills or delayed payments for hundreds of millions worth of UK financial losses each day – resulting in an upheaval that only serves to worsen with time if not addressed immediately.
Day-to-day operations can leave little time to plan for the future. Without a team dedicated solely to financial planning, businesses may find themselves stumbling when faced with sudden industry changes or unexpected challenges. This could result in hasty decisions that don’t serve their best interests – so take steps now and secure your company’s longterm success!
Investing time and money into a product is great, but it takes more than that to be successful. Without considering elements like market research and production costs there’s no way of knowing if the product will truly pay off in the end. Taking a holistic approach can help protect businesses from taking on unnecessary debt – weighing all your options pays dividends!
Outside factors like market conditions can lead to debts occurring too. When the economy is in poor health and specific markets are suffering, customer spending tends to decline, resulting in lower revenues. If a company focuses on a specialist market, then they may be affected by shifts in consumer preferences too.
Additionally, financial crises can cause interest rates to soar. When this happens, banks become resistant to lending.
Although the location of a business and talented employees leaving can cause some roadblocks for profits, unforeseen problems like criminal activity, costly lawsuits and harsh weather could have even bigger impacts. These issues can be especially detrimental to financial success as they may lead to increased debt.
How can it be avoided?
It’s never too late to improve a business’ financial health! If debt is looming or you’re trying to avoid it altogether, there are plenty of available strategies and tactics that can get your company back on the path towards success.
Assessing your budget is a crucial step to take when examining your finances. Doing so provides you with an overview of where money comes from, what stays the same each month and how much changes can be expected in expenses.
Check that your business’ revenues can cover your core overheads before portioning out a budget for variable costs. With much of what’s left, any remaining debts should be paid off. It’s well worth paying more than just the minimum too. Otherwise, debts can keep building – and may take years to pay off.
Cut down on overheads by reevaluating your current business costs – get rid of any phone systems or office spaces you don’t need and consider subletting the rest. Hybrid working provides businesses with an opportunity to significantly reduce their premises size while still being able to meet all necessary requirements.
Maximising cash flow can be as easyatriggering some clever cost-cutting schemes. Negotiating lower prices or flat rates on software purchases and eliminating unnecessary expenses are just a few ways to decrease spendingand increase profitability quickly, without resorting to drastic debt-reduction measures.
When you’re ready to start paying off debt, try to take care of the bills with the highest interest rate first. Tackling credit card debt is the most likely thing businesses will focus on, but if any debts have been personally guaranteed then you should prioritise these.
Contacting and negotiating payment plans with suppliers
Prioritise your creditors and lenders when it comes to paying them back. Reach out to see if they are willing to come up with a reasonable payment plan or look into loan consolidation programs that can help make payments more manageable without damaging credit scores.
Additionally, hardship plans that include lower interest rates and payment extensions can be very beneficial. Businesses are required by creditors to have a hardship letter explaining their current financial situation, along with proof that they require assistance to meet debt obligations. Typically, the requests ask for:
- Current and previous tax returns
- Bank account statements
- Income statement, balance sheet or any other financial statements
Paying off your business debt
If the creditor doesn’t offer lower interest rates or payment extensions, and you’re still struggling to make regular repayments, then a debt management plan (DMP) is advisable. DMPs will allow you to repay your business debt at a rate you can afford. But remember: setting up a repayment plan and failing to meet the agreed terms should be avoided by any means possible.
To help you out, we’ll take a closer look at what you should expect from a DMP below.
What is a debt management plan?
A DMP is an agreement made between you and your creditors should your business run into trouble making payments on time. A business with an agreed-upon DMP pays a smaller amount each month than what they were paying previously. The debt must still be paid off, but the smaller amounts make doing so far more manageable.
How do debt management plans work?
Once your creditors have agreed to a DMP, you’ll make one payment each month to cover all debts included in the plan. Your chosen debt management company (see below) splits this money between your creditors, who you’ll continue to pay until either your debts are cleared, or you can make the original payments again.
How do I apply for a debt management plan?
- Get in touch with a debt management company authorised by the Financial Conduct Authority to set up a plan. To search for an authorised company, check out the Financial Services Register for a full list.
- After supplying them with details on your financial situation, such as your assets, debts, income and creditors, your chosen company will then work out your monthly payments.
- The company then contacts your creditors and asks them to agree to the plan. They don’t have to, but since a DMP can help lenders get their money back, it may be in their best interests.