How to get your business out of debt

It is hard, but not impossible, to start a business with little or no funding. Capital investment at the beginning helps your business to grow stronger faster. For most businesses, the capital will come from a loan of some kind.

If you can pay them off on time, and they don’t exceed your predicted revenue, loans can be a good way to get your business off the ground and help it expand. Lines of credit, business loans and business credit cards all help you pay employees on time, purchase equipment and spark business growth.

However, too many business debts can lead to cash flow problems for your business, and stifle its expansion. If you can’t pay your debts on time, debt collection companies such as Advantis Credit may start to contact you for repayments, and you may become insolvent.

In this article, we’ll cover a variety of schemes you can use to get your business out of debt. We’ll also look at the government coronavirus business support you can apply for, to help your company manage its finances.

How can you get your business out of debt?

You can get your business out of debt by boosting your revenue and cutting costs, shortening payment terms with clients and making an inventory of your debt and how to repay it.

You can also use government coronavirus business support schemes to help manage your finances as you pay off debt, and consider business debt refinancing, business debt consolidation and Individual Voluntary Arrangements (IVAs).

Let’s look at each of these options in detail, so you can make the best decision for your business.

5 steps to get your business out of debt

New small businesses who don’t repay their debts within their companies’ first 12 months, are at higher risk of bankruptcy, according to Winnie Sun, financial adviser for Sun Group Wealth Partners. While there are schemes that can help you dig your business out of serious debt, it’s best to start with these simple steps, if your debts are manageable.

Make your own debt management plan

Many companies offer debt management plans, but making your own is simple and free, especially if you don’t owe an overwhelming amount of debt.

First, sort out all your debts – whether they’re business loans, lines of credit, or business credit cards, by interest rate or monthly repayment.

This will help you decide which debts to prioritise first. You could do what some experts say, which is tackle the highest interest-rate debt to begin with. This will make sure you clear the debt that is costing you the most money (in interest) first, leaving you more financially free.

Alternatively you can try the debt snowball method, which is where you make the minimum payments on all your debts, but make an extra payment on your smallest debt, until your smallest debt is completely cleared. This makes the rush of clearing a debt come sooner, motivating you to clear your other debts.

Create a budget

When you’re in debt, a budget is one of the first things you need to establish, and this is no different when it comes to your business debts. Creating a budget for your business outgoings will help you know exactly where your money is going, so that you can keep up with your debt repayments each month.

Get hold of your bank and credit card statements from the last few months, and use these to create a basic budget. Look at where expenses have crept up and could be cut, and where revenues are falling. If your business has multiple clients and sources of income, try a budgeting app like Quick Books to help you organise your incomings and outgoings, and save money to pay towards your debts (you can also get free versions of some budgeting apps).

Boost sales and increase revenue

Once you’ve created a debt management plan, you can think about ways to increase your company’s revenue to pay off your debts faster. To incentivise people to purchase your products or services, you could:

  • Create a customer loyalty plan. This can increase customer satisfaction, and encourage them to keep using your services. According to Business.com, repeat customers spend 67% more on average than those who are new to your business, which is perfect if you have business debt to clear.
  • Promote your business on social media. An active social media presence really increases your customers’ trust in your services. You should pick the social media platform that is right for your business, respond quickly to comments and messages, and create natural value for your customers. This means that you don’t over-promote your services, but focus on meeting your customers’ needs, with content that isn’t always focused on your business specifically .
  • Create limited-time offers. A great way to encourage sales is to create a limited-time offer. This works via the scarcity principle, which essentially means that people always want more of those things there are less of. So if you’re a seller of vintage shoes and your 1950s Suede Bombshell mules are £39.99 instead of £49.99 while stocks last, you may push your customers into buying there and then.

Cut costs

As well as boosting sales, you can also cut your expenses, and put the money you save towards clearing your debt. Some ways to cut costs include:

  • Selling off office supplies, equipment, tools and vehicles you don’t use. You can replace these with second-hand alternatives which do the job just as well.
  • Downsize to a smaller office with lower rent and utility bills. You could even start running your business from home, depending on its size, which would eliminate all the costs of renting an office. If you’re working from home anyway, because of the Covid-19 pandemic, you could make this a permanent change.

Shorten payment terms with clients

If you have a lot of revenue tied up in late invoices or long-term payment plans, you could revise your payment terms. You could give new clients a 30-day rather than a 90-day payment plan. You could also consider charging a late-payment penalty for unpaid invoices.

Top schemes to get your business out of debt

Business debt refinancing

Business debt refinancing is, in the simplest terms, paying off a business loan with another loan, that offers more affordable interest. So, you take your existing business debt, which might be accruing expensive interest, and put the amount on a loan that gives you better terms, for example, lower interest and longer repayment terms. That way, you’ve replaced your old debt with a new debt that should be easier to manage, possibly freeing up more working capital for your business needs.

However, it is important to remember that refinancing your debt doesn’t eliminate it. You’ll still have to pay the money back, even if it is on less expensive terms. You must make sure that the refinancing loan you choose offers you better terms than the previous loan you had, otherwise it’s not worth refinancing your debt. If your loan offers a limited period 0% APR, you must make sure that you pay off your debt within this period, as the interest pay spike suddenly after this ends. You should only consider refinancing debt if you have a healthy business, which isn’t in untenable amounts of debt, as you are unlikely to get a low-interest loan if your business has a poor credit history.

Debt consolidation

Debt consolidation is exactly the same as business debt refinancing, except that debt consolidation takes multiple loans, rather than just one, and puts them all on a loan with better terms. When you’re running your own business, you could have one debt on a business credit card and one via a business loan, and it can be hard to keep track. Debt consolidation helps you by creating one, manageable monthly payment, with cheaper interest than your initial loans.

If you have a lot of business debt on different credit cards, it might be a good idea to consolidate this debt on a 0% balance transfer credit card. This is a credit card that gives you a fixed amount of time interest-free, meaning that you won’t pay any interest on your debt, if you can pay it back within the agreed-upon time. If you are a sole trader, you may opt to put your credit card debt onto a 0% personal credit card. Unfortunately, 0% balance transfer business cards are extremely hard to find, so it may be better to use a debt consolidation loan for your business.

Alternatively to a 0% balance transfer credit card, you can consider a 0% money transfer credit card. A money transfer credit card works similarly to a balance transfer credit card, except that it allows you to transfer money from your credit card to your bank account. This allows you to pay off a loan lender or bank, and owe money to your credit card provider instead. With low or 0% rates, you can then repay what you owe without paying any interest.

You can also refinance/consolidate debt by getting a better business loan than the loan(s) you are currently repaying. Again, you’re only like to get a business loan with decent interest rates and length if your business and business credit rating are in healthy shape, so make sure this is the case before you take out any loans. Shop around for the best loans with the least amount of interest, and make sure you always read the small print, as what seems like a great interest deal may suddenly change after a certain amount of time. If you qualify, you may be able to use the Coronavirus Business Interruption Loans Scheme (CBILS) to refinance/consolidate your debt. With the CBIL loans, the government will cover the first 12 months of interest payments and lender charges.

Debt for equity

If your business is structured as a limited company  and you have a lot of money tied up in stock, you may be able to swap stock for debt to avoid having to pay out a large amount of cash upfront for debt payments. However, issuing more stock dilutes current shareholders, as the shares are now spread among a greater number of people. This can depress share prices. Keeping hold of more cash may put your company in a better position, though, so it is up to you to decide whether debt for equity is the right move for dealing with your business debts.

Individual Voluntary Arrangements (IVA)

If you’re in serious debt which you know you’ll find impossible to repay on your own, an Individual Voluntary Arrangement (IVA) may be a good option for you. IVAs:

  • Allow you to pay back a small percentage of your unsecured debts (and business-related debt if you’re a sole trader), based on what you can afford.
  • Write off the remainder of your debt after the duration of the IVA (usually five to six years)
  • Protect your valuable assets, such as your home and car.

IVAs help business owners in two ways:

  1. If you’re a sole trader, your company’s finances are tied up with your personal finances, and you are liable for all your business’s debts. An IVA will allow you to pay back a limited amount of debt that you can afford, and freeze interest rates on your debt. This allows you to continue trading as a business, while repaying an affordable amount of debt, and avoiding losing all your income to your debts. Rather than filing for bankruptcy, where you may have to sell the tools of your trade and stop your business trading, with an IVA your business has the chance to recover and flourish. As a sole trader, you can include debts to HMRC in your IVA, which is a good way of protecting your business from insolvency.
  2. If you’re the director of a limited company and you have a lot of personal debt, an IVA protects you from situations such as bankruptcy, which would have an effect on your position in a limited company (people who are bankrupt cannot form or become the directors of a limited company until roughly 12 months after their bankruptcy is discharged). As your personal financial position and the finances of your limited company are considered separate, an IVA allows you to pay off your personal debts at a manageable rate, while your limited company has the chance to flourish.

IVA pros

  • Allows your business to keep trading, which isn’t the case with other insolvency solutions such as bankruptcy
  • Protects the assets you need for your business, such as your tools of trade
  • Freezes interest on debts. If you’re a sole trader, this includes business debts such as to HMRC.
  • Allows your business to grow, while you pay off your debt at a manageable rate.
  • Writes off the remainder of your debt after the duration of the IVA.

IVA cons

  • Significantly affects your credit score for the duration of the IVA. This is particularly important for sole traders, whose personal credit score is the same as their business credit score.
  • If your business generates more revenue, you may have to pay back more to your IVA
  • If you can’t keep up with repayments, you may have to go bankrupt.

Time to Pay (TTP) Arrangements

If you’re anxious about your business tax payments, or you’ve accrued business tax debt, it is important not to ignore contact from HMRC. The best thing you can do is take action, and get a plan in place to sort out your tax debts. A Time To Pay arrangement can help you spread your business tax payments over a longer period of time in a more affordable way. You’ll reach an agreement between your business and HMRC. The longer repayment rates will give you more breathing space for payments, and free up more cash flow for your business. This can help you tackle your debt while saving your business from potential insolvency in the future. However, if your company is nearing insolvency, it may be better to consider an option like an IVA.

Make sure you contact HMRC yourself, and put forward a strong case for why you need a Time to Pay arrangement. Visit the Gov.uk website for further information.

Government Covid-19 support schemes

Many businesses, particularly SMEs (small to medium enterprises) have been severely affected by Covid-19. If you find your business is struggling financially, and you’re trying to repay debts without generating any income, it is a good idea to consider if you’re eligible for government coronavirus business support.

Coronavirus Business Interruption Loan Scheme (CBILS)

The government has established the CBILS to support businesses with a turnover of £45m or less. These loans are available to anyone who carries out legal business in the UK, whether you’re a sole trader or freelancer, or a limited company (as long as you trade through a business account).

A CBILS can help you solve cash flow issues for your business, while your trading is temporarily halted due to the effects of Covid-19, as you work to repay your debts. As we mentioned above, in some circumstances, you can use a CBILS to refinance existing debt.

The government will guarantee up to 80% of the value of the loan, and the first twelve months will be interest-free (the government will pay the interest bill).

The loan can be applied to a variety of financial products, including term facilities, overdrafts, invoice finance facilities and asset finance facilities.

Lenders may still make you use a personal guarantee for up to 20% of the loan value, if the loan is more than £250,000. Remember that you are liable for the full repayment of the loan, as with any credit scheme. If you can’t demonstrate that you have a healthy business, which would otherwise be profitable if not for Covid-19, you are unlikely to be eligible for the loan.

Self-employment income support grant

If you’re self-employed or a member of a partnership, and your business has been impacted by Covid-19, you may be eligible for a grant through the government’s Self-Employment Income Support Scheme.

To make a claim for this grant, your business must have had new or continuing impact from Covid-19 between 1st November 2020 and 29th January 2021, which will significantly reduce your profit.

The grant is worth 80% of your average monthly trading profits. It is paid in a single installment covering 3 months’ worth of profits. It is capped at £7,500.

You should also check the Gov.uk website to see if your business is eligible for any tax relief due to Covid-19, or any other reason. Further information on government support for businesses affected by coronavirus is also available here.

We’ve now covered several different aspects of how to get your business out of debt, and we hope you’ve found it a useful read. While loans can be a positive way to inject cash into a business that is likely to flourish, they can quickly get on top of us and stifle our business dreams, so it’s always a good idea to create a plan for dealing with business debt as soon as possible.