How to manage business debt as a small business

How do I get rid of business debt?

If your business has accumulated more debt than it can handle, it's crucial to figure out how to get things back on track. Ignoring the issue will only make matters worse and could ultimately result in you losing your business.

Here seven ways to manage business debt:

1. Analyse your budget and cut costs

Closely examine your budget to get a clear picture of what you’re spending where and what’s causing your debt problems. Check that your budget is accurate and make changes where necessary. Then, determine whether there’s anywhere you can make cutbacks to save money. You might achieve this through several small cuts or one significant reduction.

If you're not already doing so, consider using accounting software. It can help you manage your budget more effectively and stay on top of your finances.

2. Prioritise your debts

Prioritising your debts will help you determine which debts are critical and could ruin your business if left unpaid and which can be put lower down the list. 

There’s no set order - each business is different. In general, employees’ wages should be high on the list, as should payments to business suppliers. Rent and utility bills should also be a high priority, as falling behind could result in you losing your business premises or having your electricity cut off. Failure to pay these bills could also harm your credit rating. 

Payments for insurance and unsecured debt, such as credit cards, could be lower down the list, but remember that interest rates and late payment charges can quickly add up. Late payments will also affect your credit rating. 

3. Speak to your creditors

Getting in touch with your creditors is an important step in dealing with your debts. Be honest and explain your situation and what you’re trying to do to resolve it. Creditors should be understanding and work with you to help you get back on track. 

In some cases, your creditors might agree to let you make smaller monthly repayments for a while or extend your loan term to help you meet your repayments. They might also let you temporarily take a break from making repayments. Approaching your creditors as soon as possible can reduce the risk of them taking formal action to recover their debts. 

4. Involve your team

It’s important to ensure that any other directors in the business are aware of the company’s financial situation. Your team’s expertise and skills can help you devise a plan to pay off your debts, and different team members can offer different perspectives.

5. Improve your cash flow

Boosting your business cash flow can help you meet your financial obligations. Ways to do this include encouraging customers to pay early by offering different payment options and deterring late payments by adding a late payment charge to invoices. 

Additional options include leasing rather than buying equipment and supplies, negotiating longer payment terms with suppliers, and selling off unpopular stock.

6. Explore additional funding options

You could also consider raising additional funds to help you pay off your debts. Some of the options to consider include:

• Borrowing from friends and family: This can be a more flexible and cheaper option than borrowing from the banks. However, your relationship could be at risk if you fail to repay the money. It’s important to have a written agreement outlining what you will repay and when to avoid issues

• Liquidate assets: This means selling certain assets in exchange for cash and using the money to pay off debts. Assets could include a building, a vehicle or equipment

• Find new investors: You might be able to find more people to invest in your business. But be warned - they might ask for a higher stake in return due to your financial difficulties

• Crowdfunding: You could consider raising funds through equity crowdfunding. You can do this by listing your business on an online crowdfunding platform. This approach enables you to collect funds from many people - in return, they each get a share in the company 

7. Seek debt advice

If your company is struggling with debt and you can’t see a way out, it’s best to seek professional financial advice as soon as possible. A financial adviser or a debt advice company such as StepChange can help you assess your financial situation, find a solution to pay back your debt or even negotiate with creditors.

Does business debt show on a credit report?

Yes. Your business credit report outlines your business's outstanding debt and payment history. Lenders and suppliers often use outstanding debt to help assess how well your business is managing its finances. If you have a lot of outstanding debt and a poor track record of making repayments on time, this can harm your business credit score. As a result, you could find it harder to get accepted for additional credit in the future.

Business debt can also affect your personal credit score in certain situations. For example, if you take out a business loan using a personal guarantee - a legally binding agreement meaning you are responsible for repaying the loan if the business can’t - and you can’t personally meet the repayments, you could damage your credit score.  

The same holds true if you're a sole trader. You and the business are seen as one legal entity, making you personally liable for your business debts. Failing to keep up with repayments could affect your personal credit score.

What happens if a business cannot pay its debt? 

If you’re a limited company and can’t repay your debt, your business can be liquidated (or wound up). Your creditors can apply to the court to get their debts paid.