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How to manage (and avoid) business debt

How to manage (and avoid) business debt
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Are you struggling with small business debt? Don’t worry – it’s easier to take control than you think. Here’s our guide to small business debt management.

How much debt is too much?

First, let’s be clear that business debt isn’t always a bad thing. Some business debt can:

  • Help you grow your business
  • Boost your company’s credit score 

But how do you know when you have too much business debt? Unfortunately, there’s no right answer to this question. In other words, what’s “too much” for one business is fine for another.

Debt warning signs

While it’s hard to say how much debt is too much, there are still warning signs to look out for. Small business debt management is all about recognising these signs and acting on them before it’s too late. 

So, what are these signs? Well, you’re probably carrying too much business debt if:

  • There’s poor cashflow 
  • You’ve already refinanced or renegotiated your existing debts
  • You’re struggling to make repayments 

If you fail to manage your business debts, you may be forced to sell your company or declare bankruptcy. The good news is that identifying the problem is half the battle.

The next step is bringing those debts under control. 

Small business debt management: a guide 

If you want to manage small business debt, you need a strategy. Let’s break down what you should do.

Evaluate what you owe

First, you need to work out how much debt you have. So, you should:

  • List all of your existing debts, including credit cards 
  • Identify each payment date
  • Work out your current cashflow  

Now you can clearly see what you owe, and how much money you have to pay for it. 

Prioritise the debts

The goal is to pay all of your debts. However, not all debts are created equal. If you’re struggling to pay everyone, there are some debts you should prioritise:

  • Tax
  • VAT
  • National Insurance
  • Secured borrowing or mortgages
  • Business rates
  • Utility bills and insurance
  • Equipment leases

Remember, you also need to pay your employee wages. You should also pay any outstanding county court judgments (CCJs). 

Manage your cash flow

Next, look at ways to improve your cash flow. For example, you could:

  • Chase outstanding debts
  • Collect customer payments quicker
  • Sell items you’re not using

Make sure you have a system in place for monitoring cash flow. 

Refinance or renegotiate

Contact creditors and tell them you’re struggling to make repayments. They may give you longer to repay the debt, or accept lower repayments for a time. 

If you have multiple commercial business loans, consider consolidating them into one larger loan with lower interest. Just be aware that you may need to secure this loan against business assets, which is risky.

Set a realistic timetable

It’s unlikely that you’ll reduce your business debt overnight. So, be realistic about how long it’s going to take and set some goals. For example, maybe you want to repay your debts over six months, or a year. 

Setting a timeline keeps you accountable and motivated.

Get help

There’s no need to struggle with business debt on your own.

If you can’t pay your bills and you don’t know where to get started, contact the Business Debtline for advice. And if you have unpaid tax bills, contact HMRC as soon as possible. It’s sometimes possible to work out a repayment plan.

How to avoid small business debt

Small business debt management is helpful for companies struggling with existing debts. But is it possible to avoid acquiring business debt in the first place? Maybe – let’s take a look at some helpful strategies.

Make more money 

It sounds obvious, but you can reduce your debt by simply making more money. Strategies might include:

  • Diversifying your products or services
  • Offering incentives and loyalty schemes
  • Switching to suppliers who let you return unsold goods
  • Running seasonal sales to shift stock  

Sell unused assets

Don’t keep unsecured assets lying around if you don’t use them. Sell them and put the money towards debt repayments or growing your business. This process is also known as “liquidating assets”.

A caveat: never sell secured assets. This could be considered fraud. 

Change payment terms

Now is a great time to go over existing contracts and invoice terms. Here are some examples.

  • If you have regular suppliers, try to negotiate discounts for bulk-buying or placing frequent orders.
  • Where possible, negotiate early payment plans with your customers. 
  • Chase outstanding payments as soon as they fall due. 

Why small business debt management matters

The longer you ignore debt problems, the worse they become, which is why debt management is so important. Unpaid business debts can affect your credit score and you could lose your business.

Don’t let business debt become unmanageable – improve your cash flow. Communicate with your creditors, and get debt advice if you need it. 

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