How to reduce business debt

The pandemic saw businesses take on record levels of debt. As companies look towards their post-pandemic future we report on what strategies can be used to reduce the debt they have.

According to accountancy firm EY, by the end of 2021, businesses will have taken on an estimated £61 billion in debt. Business debt can also take many forms. For example, outstanding invoices that have not been paid is a persistent source of business debt.

Indeed, according to figures from the Federation of Small Businesses (FSB), 65% of small businesses that supply to other companies have suffered late or frozen payments. The latest Pay.UK data show that the sum of late payments due across the country rose 80% to £23.4 billion at the end of last year.

FSB National Chairman Mike Cherry says: “Cash is still very much king for small firms and withholding it has pushed many to the brink at a time when they’re at their most vulnerable. Our endemic culture of treating small businesses as free credit lines against their will must be brought to an end.”

The vast majority of businesses will have a mixture of debts that must be managed to mitigate their impact on the enterprise’s cash flow. The FSB’s Fair Pay Fair Play campaign is just one example of how small business owners can take control of some aspects of their debts.

In addition, Brexit has complicated the debt recovery process for businesses that trade with the EU. Your business can no longer use the European Payment Order or use the European Small Claims procedure. Take legal advice if your company has outstanding debts with any businesses within the EU.

Debt control

Todd Davison, Managing Director, Purbeck Personal Guarantee Insurance, spoke with us.

What are the main types of debt small businesses are suffering from at the moment?

“The main debt will be from the Business Interruption Loans introduced by the British Business Bank in response to the COVID-19 pandemic. Small businesses had the opportunity to apply for a Bounce Back Loan (BBL) or Coronavirus Business Interruption Loan (CBIL).

“Under these schemes, small businesses benefitted from a 12-month Business Interruption Payment where the government paid for all interest, costs and fees incurred on the borrowings. After the initial 12-month period, the loans then become repayable – BBLS are 2.5% interest per annum and paid back on a capital and interest basis, but CBILS can have interest rates of up to 14.99%. For those businesses who elected a variable rate loan, the repayments will become more expensive if there are rises in the base rate during 2022.

“Many businesses effectively replaced trading revenues (which were adversely impacted as a result of COVID-19 and measures introduced by the government to control the spread of the virus) by debt which has the impact of weakening balance sheets.”

Are small business owners often unaware of the practical steps they can take to reduce their company’s debts?

“There are several measures available to small business owners including refinance, requesting repayment holidays or term extension, or focusing on cost management and or working capital within the business to increase liquidity and ability to meet loan repayment obligations.
“Business owners will, generally, be aware of the ways to reduce their company’s debts from a theoretical perspective but the process of doing this may not be as well known. For example, they need to know where to go to access business finance and who to approach should they wish to seek an independent analysis of the supply chain and contracts to help improve their working capital position.”

What are the first steps a business should take to restructure its debts? Are there various approaches that can be taken?

“Accountants are well placed to understand and advise on this – particularly, if it is a retained accountant who will have an existing working knowledge of the business. The accountancy practice may have a corporate finance service offering or, should be able to support the business by making necessary, advised introductions.”

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Your debt checklist

Follow this checklist to start to manage your business’s debts today.

Audit your business’s existing debts
Before you can take action to reduce the debts your company has, you need to understand what your business owes and, importantly, who has outstanding debts with your business. Once you have this information, you can create an action plan.
Prioritise your debts
Once you have completed your debt audit, you now need to look closely at whom your business has debts with. HMRC will levy penalties for late tax payments – particularly VAT, so look to speak to HMRC first to arrange more time to pay or a payment plan to settle these debts. Other debts also need to be assessed and dealt with next.
Debt consolidation
Replacing one debt with another may seem counterproductive, but the consolidation of debts is a tried and tested method of reducing overall debt. If your business has several debts with varying interest rates, using a debt consolidation service could offer a much lower monthly payment and interest rate.
Take help and advice

Don’t suffer in silence. Many organisations can help with debt. Business Debtline is a good example. Speak to your accounts and solicitors about how they may be able to help. Restructuring debts and something as simple as a solicitor’s letter sent to anyone who owes your business money can have a surprising effect on settling these debts.
If left unchecked, debt can be toxic not just to the cash flow of your business but also to your wellbeing. Debts, whether this money your company owes or payments from customers, can’t be ignored. You are not powerless to act. Taking a proactive approach to debt will always lead to a resolution that will be beneficial to all parties.