Most businesses operate on trade credit which is at least 3 times bigger than bank lending in the UK today. Trade credit is a buy now, pay later circumstance, so if you start to fall behind on your payments, you could start getting into debt. If you’re not paying your bills, your credit lines could also be cut and if your suppliers cut you off you won’t have a product to sell. The first thing to think of is why are you getting into debt? Are you not getting enough business through the door or are you dealing with uncreditworthy customers who don’t pay you? If it’s the latter we always advise companies to credit check their potential customers to make sure they are able to pay their bill on time for the services you have provided. If they can’t pay you, it could seriously damage your cashflow.
If you are struggling with big amounts of business debts, read our top five tips to reduce it here!
1. Communicate with creditors and lenders
When you’re in debt, don’t try to run and hide from it. The pressure of debt collectors will soon get to you and you could have a default or CCJ assigned to your company if you consistently ignore and refuse to pay your creditors. It’s important to note that if you pay a CCJ within 30 days it will be wiped from your credit report. If you don’t pay it within 30 days it will stay on your credit report for 6 years. Communication is key when you are trying to reduce debt, it is in many creditors best interest to work with you to help you pay your debt back rather than going down the legal route as a) it’s expensive, b) it’s time consuming and c) they may not get their money back at the end of it anyway. Therefore getting in contact with them and trying to work out a suitable payment plan for you will benefit both parties, so always try to reach out to them if you are feeling a bit claustrophobic when it comes to your debt.
2. Reduce business expenses
It’s surprising how much business expenses can add up, especially if your job involves traveling to see clients or holding a lot of events. If you have field sales staff, create a policy where the cost of a sale will outweigh the expenses you need to pay to visit new business. For example, an appointment can only be set if the potential customer has a deal of over £1500. Weighing up a deal and how much it would cost to get there and pitch to them should help you decide which deals are worth paying the expenses for.
Take a look at your operating costs as well, some expenses could be slipping through the net that you don’t need. For example, are you paying a subscription for a service that you seldom use? Are you paying for a very expensive office and can moving to a cheaper one benefit you? It’s even worth checking to see if you are over staffed. If you are over staffed but couldn’t afford to lose staff of certain skill sets, there are government schemes you could get involved with that help people get into the work force. For example, if you get involved with Jobs Growth Wales and take a candidate from their website, they will pay their first 6 month’s salary. If you decide to keep that member of staff you have 6 months to get your finances in order ready to be able to pay their salary after the 6 months is up. There are also further government schemes for young companies or start-ups, do your research to see if any of them would suit you.
Seek advice from your accountant to see which area of the business is costing you the most money and work out where you can cut back on costs. Your monthly statements should be helpful to pinpoint what expenses are causing your company to get into debt, analyse them carefully and weigh up all your options.
3. Concentrate on increasing your cashflow
Increasing your cashflow; easier said than done- but a crucial point. If you look at it in black and white; if you’re getting into debt, you need more money coming into your business to be able to pay it off. Cutting back with your spending will contribute to your reduction in debt, but ideally more money coming in to pay it off will have the most impact. Offer discounts and incentives to boost customer retention, and think of creative new ways to target new customers. When you’re sending campaigns to target customers, go for the cheaper option. Send an email campaign instead of direct mail; pick up the phone instead of visiting and use social media to gain leads, it is a very cheap way of self-sourcing. Another thing to do is to follow up on late payments; customers not paying you can have a massive effect on your cashflow, so make sure you collect money owed to you. Read our blog post on how to get paid on time. Build strong relationships with your current customers and upsell to them, it is easier to sell to customers you already have than to a brand new prospects.
4. Rework your budget
Get to grips with your financial plan and make sure you aren’t missing any payments. It’s better to pay the minimum amount you can afford off your debts than to ignore them all together. For future budgeting, cut back on spending and leave room for unexpected changes in your cashflow if you are planning to pay off more of your debts. Keep track of the money flowing in and out of your business and see where you can adapt it to work better for your business. Constantly revisiting your budget and tweaking it slightly will allow you to keep a clear focus of your goal and control of your finances.
5. Avoid further loans or credit cards
It may sound fairly obvious, but if you take out a credit card or a loan to pay off your debts, it could lead you into more debt. Borrowed money always has to get paid back and usually with interest. Some directors may even take out personal loans or credit cards to keep their business afloat, but remember, if you’re a limited company and the company fails, you as an individual are not responsible for paying back money it owes; you are only responsible for your shareholder funds. However if you have a personal loan or credit card, you will be liable to pay this back as an individual. It is better to cut back your spending now and pay your debts from money you are earning rather than money you have borrowed. Avoid further loans and credit cards until you are in the position to be able to pay it back over a comfortable period of time without putting your business at risk.
Many companies get into trouble due to bad paying customers. If they don’t pay your bills then you can’t pay yours. Going forward always credit check your customers to make sure they will be able to pay you, and don’t only credit check them once, monitor them to make sure they remain creditworthy. Get a free trial of Creditsafe today and protect your business from bad payers, knowing who you are dealing with could be the savoir of your company so never go ahead in business unless you are confident that they will be able to pay you.