Are you among those people who spend sleepless nights worrying about your business debt? If yes, then don’t worry because you are not alone. Over 49 per cent of all the business owners in the UK find it difficult to handle their business debt. Handling business debt can be a very challenging task for a small business owner.
When things start getting out of control financially, it seems like there is no way out. It is due to this reason that most businesses go into bankruptcy. However, according to the new law imposed by the UK government, it is now difficult for businesses to declare bankruptcy as their way of escaping debt repayments.
Filing for bankruptcy in Court and paying a solicitor thousands of pounds is not going to help with your debt, is it? Additionally, it will also severely affect your credit score, your brand reputation will be destroyed and it will be difficult for you to regain any stability in your business.
Thankfully, there are certain ways to avoid these financial disasters. Here are four ways to deal with small business debt.
1: Do Your Homework Before Taking A Loan
It is essential for any business to calculate their debt coverage ratio before they move on to apply for a business loan. This ratio determines your company’s ability to repay the loan.
Debt coverage ratios are also one of the major factors used by various finance lenders to help them determine the amount, interest rate and the terms of the loan. There are several ways by which the debt coverage ratio is calculated.
One of the most common ways is by dividing the net operating income by the interest and principal payments of the debt (total debt service). To understand the equation better, consider this example. Considering you have an annual net operating income of £25000 and a total debt service of £21000,your debt coverage ratio is 1:19.
Most high street banks consider the ratio of 1.15 and above to be optimal. But if you have a ratio that is 1 or below, it is high time you look for ways to increase your cash flow.
If you feel that your loan application could be rejected based on the debt coverage ratio, then there are several other ways a business can secure funds. Alternative finance firms are readily available to help SMEs suffering financially. They offer cash flow finance to businesses in need.
Their terms and conditions for eligibility are different from that of the high street banks. Hence, if you feel your business does not pass the eligibility criteria coined by the high street banks, you can turn to these alternate finance firms for help.
2: Increase Cash Flow to Pay down Debt
Being in debt is not an ideal state for any business. So, repaying debts should be a priority for the company. Here we provide a few ways to boost your cash flow, which will eventually help you repay you debts as soon as possible.
Being efficient or searching for new ways to increase your business revenue are safe strategies to increase the cash flow of your business. You can even focus on improving you’re the skills of your employees or invest in implementing new technology to increase the productivity rate of your company. Improved productivity eventually increases business revenue.
Although investing in employee training and new technology could cost you a lot to begin with, the returns more than make up for it. For this purpose, a business needs a well structured marketing plan that can increase their profits which in turn will help reduce the debt.
Renegotiating Terms with Vendors
Maintaining well balanced accounts of your company’s expenses on a monthly basis will improve cash flow and accelerate your ability to repay the loan. Usually, suppliers offer payment terms of 15, 30, 45 and 60 days after the delivery of the products and services.
What you can do is try and negotiate with your suppliers of an early payment discount, which can offer a 2-10% discount. Also, look for new suppliers that may offer you better quotes than your existing ones. These is a great way to increase your business’s cash flow.
Optimise Inventory Turnover
Inactive or access inventory can possibly drain your cash reserves. Because of this reason, inventory should be monitored very carefully and should be purchased only when it is required. If there is a way, you can work with suppliers that offer either a consignment inventory or permission to return the unsold supplies.
3: Future Proof Your Debt
Over the past few years, the interest rates for credit card debt, mortgages, auto loans and lines of credit have increased from 1.25% to 1.50%. So, when there is a rise in the interest rates, small businesses that have high debt and variable loans are more likely to be at risk.
Alternatively, when the interest rates are at record lows, it is advantageous to consider locking in a fixed rate interest loan before they rise again. A fixed rate interest loan is more like your lender’s promise to maintain the said rate for a specified time period.
This helps you pay your debt at a lower rate, although there is a hike in the interest rate later. However, the initial step to this is to identify the type of loans you have and to decide whether you need a fixed rate loan or a variable rate loan.
4: Consolidate Loans
One of the fastest ways to lower your interest rates and repay your debt amount as soon as possible is by consolidating debt. It means that instead of having to pay different loans at different interest rates, you can consolidate all of them in a single low-interest loan.
Consider this example for a better understanding. Let’s say that you have two different loans, one with an annual interest rate of 13% and a current balance of £10000 and another with an annual interest rate of 12% and current balance of £20000. This makes your current monthly payments £1200.
By applying debt consolidation, assume your interest rate drops to 9.2% (the rate depends on the firms that offer debt consolidation). This would mean that you will be paying £750 per month and you will save £450 every month.
To determine whether consolidating debt is the right option for you or not, consult your financial advisor today.