A small business guide to identifying and resolving debt

03 October 2018

Unmanageable, spiralling debt is a very real danger for many businesses – especially young and small businesses yet to build up capital. Balancing the day-to-day operations with the behind-the-scenes activity of a business is a difficult process, but when you factor potential debts into the equation, everything becomes a lot more pressurised as a result. Incurring debts is an unpleasant experience as it is, but should they go unchecked and unresolved, a business can shut down and cease to trade as a result.

This important issue is not one to be taken lightly. Staying on top of any business debts is essential when staying afloat on those choppy SME waters. Here, we’ll run through the support you can get for business debt, their most common causes and what you can to do to avoid the pitfalls of business arrears.

Quick Links

What are the causes of business debt?

It is common for small businesses to face debt in the early stages of setting up. A business venture tends to rely on debt financing such as a business loan or short-term loan to finance the necessary expenses of offices, employees and the product/service that will be offered. However, business debt can be caused by numerous other things like external factors, mistakes or neglect.

Accountant analyses data and figures

A big issue that small businesses can face is delayed payments and unpaid bills. Hundreds of millions of pounds are written off in the UK every day in the form of delayed payments and unpaid bills. Non-payment to these businesses can cause a snowball effect, hindering their ability to pay for wages, purchase inventory and repay debts. Without this finance, businesses can’t invest in their staff, product and service or marketing to a new audience. As a result, banks and lenders are less likely to support them.

SMEs can also find themselves facing time constraints from running the day-to-day business. This can lead to a lack of opportunity for forward planning and result in hasty decision-making. Businesses without a dedicated finance officer or a 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. There is less way of telling whether or not a product is financially viable as a result, even if it’s a sound product. Considering all angles is key to avoiding business debt in this regard.

A brilliant presentation

Outside factors like market conditions can lead to debts occurring too. When the economy is in poor health, as well as specific markets, 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, leading to banks being resistant to lending, favouring medium-sized businesses instead. This leaves small businesses unable to compete, making it extremely difficult to win business when compared to financially stable, business-generating medium-sized companies.

Other problems within the company could put a stop to profits as well, including the location of the business, valuable employees departing or even lawsuits. Likewise, unforeseen problems such as criminal activity and extreme weather can have a knock-on effect. 

How can it be avoided?

If businesses find themselves in debt or they’re looking to avoid it in the first place, there are ways and means of improving financial health, provided they aren’t in too deep.

From the outset, taking another look at the budget is well worth doing, as it 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 things like rent and utility bills, before portioning out a budget for variable costs. Using much of what’s left, remaining debts should be paid off and it’s well worth paying more than just the minimum, otherwise, they’ll 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, and consider subletting unused office space or working in a smaller area to keep rent low. Even 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. Pinpointing these expenses in order to cut costs can be a speedy way of increasing cash flow, and is certainly more advisable than more drastic debt-reduction measures.

Like what you’re reading? There's even more content on our social media – why not follow us to keep up to date with all things Gazprom Energy?

gazprom energy twitter gazprom energy facebook gazprom energy linkedin

When beginning to pay off debt, it’s advisable to take care of bills with the highest interest rate first. Tackling credit card debt is the most likely thing to focus on, but if any business debts have been personally guaranteed then 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 you 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

If the creditor doesn’t offer one, the next step is to ask for a payment plan or reduced settlement amount. Whether they’re less willing to accept or more willing to reduce a debt, make it clear to them that you will fulfil your end of the bargain in a speedy manner. Setting up a repayment plan and failing to meet the agreed terms should be avoided by any means possible.

Gazprom Energy is a leading and award-winning business energy supplier, helping thousands of small 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.


Share this

You may also like...