Your guide to managing business debt

If your business is struggling with debt, you’re not alone. Rising costs, falling revenue and unexpected setbacks can quickly push businesses into financial trouble. The key is to act early, stay organised and take practical steps to get back on track. 

This guide explains how to tackle business debt head-on – from reviewing what you owe and speaking to creditors, to cutting costs and exploring your refinancing options.

Key takeaways

• If your business is experiencing debt issues, it’s important to act sooner rather than later

• Consider taking steps such as cutting costs, improving cash flow and chasing late payments

• Contact your creditors as soon as possible, because they may be able to offer you an alternative repayment plan

• Seek free debt advice if your problems are serious and you’re struggling to find a way out.

Business Debtline is a free debt advice service for small business owners and the self-employed. Its advisers can help you assess your financial situation, understand the solutions available, and support you in taking the next steps.

How to get out of business debt in eight steps

Ignoring business debt can make the situation worse and ultimately lead to you losing your business. The following steps can help you manage your business debt and regain control of your company finances.

1. Understand your debt situation

First, you need to have a good understanding of your business’s current financial position. Make a list of all your outstanding debts, including the amounts owed, the interest rates, payment terms and any collateral you’ve used. 

As you do this, you can start to prioritise your debts, working out which ones could threaten your ability to operate if left unpaid, such as your rent, utility bills and employees’ wages. 

Lower-priority costs such as insurance or loan repayments can follow, but don’t ignore them. Late repayments and mounting interest charges can rapidly become expensive and damage your credit rating. 

2. Cut costs

If you’ve created a business budget, now is the time to review it and see where you might be able to make cutbacks. Could you negotiate better terms with suppliers, for example? Could you switch to a more competitive energy deal or software subscription? 

Instead of hiring new staff, think about using freelancers or contractors, and consider using social media and blogs to push your business online, rather than paying for expensive marketing campaigns.   

3. Speak to your creditors

If you’re struggling to repay debts, it’s essential to contact your creditors as soon as possible. When doing this, be transparent about your situation, explaining why you’re struggling to keep up with the repayments and what you’re trying to do to resolve the problem. 

Many creditors would rather help you stay in business than risk not being repaid at all. They might be willing to extend your repayment term, reduce the interest rate or give you a short payment break while you get back on your feet. 

4. Improve cash flow

Accurate cash flow forecasting helps you to spot trouble before it hits – such as periods when outgoings may exceed income. If you’re already facing negative cash flow, take steps now to reverse the trend.

Strategies to improve cash flow include:

• Encouraging customers to pay promptly by offering discounts to those who pay early and late fees for those who don’t pay on time

• Negotiating longer payment terms to reduce the risk of a cash flow shortage

• Leasing equipment rather than buying it to avoid hefty up-front payments

• Regularly reviewing inventory, so you avoid stocking up on products that aren’t selling

5. Explore debt consolidation or refinancing

Debt consolidation enables you to take out a new loan to pay off multiple existing debts from different lenders, while refinancing a business loan refers to the process of applying for a new loan to pay off an existing one.

Ideally, the new business loan should offer better terms, such as a lower interest rate or longer repayment term. This can reduce the cost of your monthly repayments, so they become more manageable. But it can also reduce your business’s administrative burden, because you only have one repayment to meet each month and one lender to deal with.

Just watch out for early repayment charges if you pay off an existing debt early, and bear in mind that extending the repayment term means you end up paying more interest overall.

6. Seek equity finance

Another option is to sell shares in your business to investors to raise additional funds. Known as equity finance, this enables you to raise cash without needing to repay it.

There are plenty of routes available, including angel investors, venture capital, private equity and equity crowdfunding. 

However, be aware that if your business is in financial difficulty, investors may demand a larger stake in return for taking on greater risk.

7. Consider restructuring

If you’re still finding it difficult to get out of debt and you’re unable to raise additional finance, you may need to consider insolvency solutions. However, before you go any further, it’s crucial to seek financial advice, because this isn’t the right option for every business.

Options to think about include:

• A Company Voluntary Arrangement (CVA) – This is a legally binding agreement between a business and its creditors to pay off a portion of its debts over time, while the business continues to trade

• Administration – Here, the business or directors appoint an administrator to manage the company’s affairs, with the aim of selling assets to repay debts or restructuring the company

• Liquidation – If a company is no longer viable, the directors may voluntarily choose to close the business and its assets are sold to pay off creditors

8. Seek debt advice

If your business debt feels unmanageable, seek free, professional advice as soon as possible. Whatever you do, avoid paying for help at this stage.