A guide to identifying and resolving business debt

17 January 2022

Unmanageable debt is a very real danger for many businesses. Balancing day-to-day operations with the behind-the-scenes activity of a business can be a difficult process, but when you factor potential debts into the equation, things become a lot more pressurised as a result. And when debts go unchecked and unresolved, shutting down and ceasing to trade as a result could well be imminent.

Clearly, it’s not an issue to be taken lightly. Staying on top of any business debt is essential when staying afloat in choppier waters. Here, we’ll run through the support you can get for business debt, how it most commonly occurs and what you can do to avoid the pitfalls of business arrears.

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What are the causes of business debt?

Business debt can be caused by numerous things like external factors, mistakes, or neglect. Businesses can face big issues in the form of delayed payments and unpaid bills. Hundreds of millions of pounds are written off in the UK every day as a result of delayed payments and unpaid bills. This creates a snowball effect, hindering businesses’ ability to pay for wages, buy new inventory and repay debts. Without this finance, businesses can’t invest in their staff, product or service and they can’t market to new audiences. When this happens, banks and lenders are less likely to support them.

Accountant analyses data and figures

There can also be time constraints caused by running the day-to-day business. With less time for forward-planning, hasty decision-making can easily occur. Likewise, businesses without a dedicated team tasked with mapping out the business’ financial future may not be able to react to industry changes or challenges as swiftly as they may like.

Say for instance that a product has time and money funnelled into it, but nothing has gone towards market research or the cost of production. Even if it’s a sound product, there’s little way to tell whether a product is financially viable as a result. Looking at all the angles is key to avoiding business debt in this regard.

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.

A brilliant presentation

There are other problems within the company that could put a stop to profits as well, from the location of the business to valuable employees departing. Likewise, unforeseen problems such as criminal activity, costly lawsuits and extreme weather can have a knock-on effect too, causing significant issues that can increase business debts as a result. 

How can it be avoided?

If businesses find themselves in debt (or they’re looking to avoid it in the first place) there are plenty of ways they can improve financial health - provided they aren’t in too deep.

From the outset, combing over the budget is well worth doing. This helps to put your current financial situation in context, and identifies income sources, fixed costs and variable 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.

Business people making a decision

From here, curbing unnecessary costs and business expenses can help to free up some money. Get rid of, or sell, anything you’re not using such as costly phone systems. You could even consider subletting unused office space or moving to cheaper premises to keep rent low. With hybrid working now common for many businesses, you might decide you could substantially downsize and still have the space available to meet your team’s needs.

Even things like computer software can put a dent in the company coffers. See if you can negotiate reduced prices or flat rates with certain vendors, or consider if the software is necessary in the first place. Pinpointing these expenses in order to cut costs can be a speedy way of increasing cash flow, and is certainly more advisable than 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

When dealing with creditors or lenders, identify which must be paid first. Once this has been done, contact them to see if they’re open to arranging payment terms, and ask lenders about loan consolidation programmes. Consolidating loans into one payment can help reduce monthly costs without damage to credit, too.

Contractor delivering presentation

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.

Gazprom Energy is a leading and award-winning business energy supplier, helping thousands of businesses manage their gas and electricity contracts. To find out more about what we can offer your business, visit the homepage or call us today on 0161 837 3395.

The views, opinions and positions expressed within this article are those of our third-party content providers alone and do not represent those of Gazprom Energy. The accuracy, completeness and validity of any statements made within this article are not guaranteed. Gazprom Energy accepts no liability for any errors, omissions or representations.

 


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