How to manage debt for your small business

Financial debt isn’t a sign of a bad business, or even a lack of income. After all, many companies have debt, especially in their early years, or take on debt in order to expand. 

Debt only really becomes a problem when it’s poorly managed.

In an effort to help, this guide will offer some advice on how to manage debt for small businesses, including:

• Know when to be worried about debt.
• Prioritise your debts.
• Restructure your debt.
• Negotiate better payment terms.
• Cut unnecessary costs.
• Sell unused assets.
• Boost your flow of income.
• Make sure lenders are treating you fairly.
• Manage your income and expenses with accounting software. 

As we mentioned up top, debt is not necessarily a huge problem. But there are a few warning signs to look out for that will tell you when to start worrying about it and take action before it becomes a real problem. 

If you recognise any, or all, of the following warning signs in your small business, it’s a sign that you need to start worrying about your debt and improving your business performance: 

• You’re receiving less money that you’re spending.
• You’ve had to take out additional loans to cover your original debt. 
• You’re having trouble with cash flow. 
• You’ve already had to renegotiate once before with lenders. 

Recognising these signs, and taking them seriously, is an essential step for small businesses to manage their debt. Continuing with poor financial management can lead to serious consequences. 

Debt can be quite overwhelming when you look at it all together, so breaking it down into more manageable chunks will help you deal with the situation rationally and reduce your stress. 

You can do this by prioritising your debts. Figure out which ones need to be paid immediately and focus on them first. 

High priority debts are any that could get you in trouble legally, interrupt business operations, or quickly lead to further financial trouble, if they’re not paid on time. Some examples include:

• Business rates.
• Utility bills.
• Mortgage and rent payments.
• Tax bills.
• Payments to strategic suppliers.
• Bank loans.
• FIxed or variable business loans.
• Anything where you’ve put your name down as a personal guarantee.

Debt restructuring is a process that businesses and individuals can go through to prevent them from defaulting on a loan. Restructuring could help you by:

• Turning a number of different loans into one, more affordable, one. 
• Lowering the interest rate.
• Extending the repayment period. 

There are a number of companies out there that will give you great advice and help you with debt restructuring. You should get in touch with them before trying to do anything on your own. 

If you’re dealing with independent lenders and creditors, you can approach them personally and discuss the possibility of changing the payment terms.

If you plan to do this, here are a few helpful tips:

• Approach them with the idea before you default on a payment.
• Explain the situation and how you plan to improve it.
• Stay positive, reinforcing the fact that you want to pay them back. 

Most lenders will be open to a negotiation like this. After all, if your business fails and you go bankrupt because of debt, then they’ll never get any money back at all. 

When debt becomes a problem, the first thing to go should be any unnecessary costs

In this instance, an unnecessary cost would be anything that you don’t need to continue business operations, like luxury items and benefits. 

You should also shop around to find cheaper suppliers of supplies, subscriptions, and insurance. And don’t automatically renew any contracts you already have. Instead, you should re-evaluate your spending on services every year.   

For more information about reducing costs, check out our article, “How to cut costs in a small business”.

To get some money quickly, you should consider selling any assets that aren’t giving you any financial benefit. This is sometimes called “liquidating assets”.

Unused assets are usually cosmetic or luxury items that you have in the office. And, while it might feel bad getting rid of them, it’s better than going bankrupt. 

This sounds obvious, but the only real long-term solution to your debt problem is by bringing in more money. So start looking for opportunities to improve cash flow, including.

• Finding more leads.
• Upselling.
• Promoting and partnering with other businesses. 
• Raising your prices.

We would say you should be careful with the last one. Suddenly raising your prices might cost you business in the long-run, leading to more financial problems down the line.

If you feel like your lender is treating you unfairly by a registered lender, like a bank or building society, you can seek help from the Lending Standards Board (LBS).

The LBS is an independent organisation that helps oversee relationships between small businesses and financial institutions. They hold a lot of authority in the financial world, so they can help you settle disputes between you and any lenders that aren’t playing fair. 

Alternatively, the Financial Ombudsman Service might also be able to help. They are an independent, government appointed service that help settle disputes between financial services and their customers. 

Financial management can be stressful and time-consuming when you’re self-employed. That’s why thousands of business owners use the Countingup app to make their financial admin easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Find out more here.