Many small businesses have a constricted cash flow, particularly during phases of growth. The need to invest in people, premises and raw materials, plus the ever-present threat of late-paying customers, can easily mean that they take on considerable debt. However, if their borrowing is spiralling, that doesn’t mean they’re on the road to liquidation. Here are five steps to take if you’re finding yourself firmly in the red.
1 Cut your costs
This may sound pretty obvious, but it’s amazing how many businesses fail to do this. Obviously you can’t forgo paying rent or salaries, but there are plenty of smaller ways that you can reduce your outgoings – and they soon add up.
If you’re outsourcing accounting or other business processes, see whether you can get them cheaper or whether it would make more sense to bring them in-house.
If you have office space you’re not using, look at downsizing. Consider new contracts for mobile phones, stationery and consumables – now your business has grown and developed economies of scale, you may be able to negotiate a far better deal.
Finally, look carefully at your employees’ expenses and make sure they’re adhering to the spirit as well as the letter of the rules.
2 Negotiate with your customers
It costs a great deal less – in terms of both time and marketing resources – to make additional sales to existing customers rather than obtain new ones. Network with the customers you have to see whether they have unmet needs that your company can fulfil.
Similarly, if you’re really struggling, negotiate with your suppliers to see whether they can offer short-term discounts to help you through the bad patch or defer payments for a while so you can dig yourself out of debt.
3 Consolidate your debts
If your business is in debt, chances are it has multiple forms of borrowing from a number of institutions. Each will have its own interest rate and its own monthly repayment date, making it very difficult to budget or forecast your cash flow.
Worse, some of these debts may attract quite substantial interest rates, even though base rate is at a historic low. Consolidate your debts into a single loan and you will make just one repayment a month, potentially with a significantly lower interest rate.
You may even be able to extend the term over a number of years, further reducing your monthly outgoings.
4 Seek professional debt advice
Just because you’re an entrepreneur, it doesn’t mean you’re a financial expert. If you don’t have a firm grip on your income and outgoings, don’t be afraid to seek professional advice, whether from a debt charity, business mentor or independent financial adviser.
The recommendations you receive should be both insightful and impartial, without any attempt to steer you towards a particular product of service – and it should keep your business from going to the wall.
5 Consider a CVA
A Company Voluntary Arrangement (CVA) is an excellent alternative to bankruptcy if all other measures fail. It gives you legal protection against being sued over outstanding debts, whilst guaranteeing that your creditors will receive some portion of what they are owed.
You will enjoy some breathing space whilst you restructure your finances and will retain control of the company (as opposed to liquidation, where professional administrators would be appointed). In the longer term, you will probably be able to restructure your debts so they are more affordable and may be able to persuade your creditors to write off a significant proportion of what you owe.