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At first sight, the word “debt” may conjure negative associations, but debt is a necessary part of business operations. The problem, particularly with the current borrowing cost, is ensuring you’ve got the correct debt. 

Knowing precisely what debt your business has and how you use it is essential, as a regular review of your current debt may result in significant cashflow improvements.

1 Understand why debt matters

“Debt” is a deceptively simple little word that covers many different types of loan and credit arrangements, each with its own terms and conditions. These are just a few: 

• Unsecured business loans
• Secured business loans
• Invoice financing
• Overdrafts
• Credit cards
• Government loans, including start-up loans and the Covid-related Bounce Back (BBL) and Business Interruption (CBILS) loans

So there are lots of types of debt. But not all debt is equal, and the different types are valid for different situations. Sometimes a business needs money and only has limited borrowing options available. We all know that beggars can’t be choosers, so we go ahead and make do with what’s on offer. Later, though, if the business changes, other options may become available, and previous borrowing may no longer be best for the new circumstances.  

So the first thing you need to do is find out what monies you owe, to whom, and under what conditions. 

2 Make a list of all borrowing

This can be quite a revelation. You may even find you’re paying a premium for borrowing options that you aren’t using – overdrafts and credit cards, for example, will incur fees even if you have money in the account and pay off the total each month. Don’t rush in and cancel them, though: looking at all the borrowing together is essential!

Ensure you know the lender, the type of borrowing, the interest rates (are these fixed or variable?) and any annual renewal fees. If it’s a loan, is it secured or unsecured? How much longer does it have to run? Are there early cancellation fees?

Once you have this complete picture, you’ll be in a good position to decide how to move forward.

3 What are your options?

No one course of action will be right for every business. But now you know where you stand, you can make informed decisions.

Credit card interest rates tend to be very high, so you may choose to handle the repayments differently in future; you may want to cancel one or more of the cards, or perhaps you need to request a change to the borrowing limit. Maybe what’s needed isn’t a change to the cards themselves, but a review of how you and your staff use them.

As for loans, if several have been taken out at different times, and perhaps with different lenders, you may now see that you could prioritise paying them off depending on the conditions of each loan. Or you may find that you’d benefit from consolidating them and perhaps paying them off over a longer term.

4 What about the director’s loan?

As the owner or director of a business, it can be very tempting to use the business bank account as if it were your own. But if you withdraw whatever you need without proper justification, you are treading on dangerous ground and risking being accused of acting fraudulently. What’s more, although it may seem to be a simple way to handle things, there could be alternative ways to extract cash from the business that will be better for the business and your personal tax situation.

5 Have you thought about investment?

While debt is a normal part of business operations, other ways exist to inject money into a business. You should look at the possibility of a new investment. This could either be by the owners and existing shareholders or come from new external sources. 

If the business needs an injection of capital to fund its growth, you may need to work with external stakeholders. This will probably mean changes in how the business is run. As always, the more precise your understanding of your current position, the better you’ll be to make the best decisions. 

We and our expert network are familiar with all types of debt and funding options and have helped clients secure multi-million-pound funding deals. We’d love to chat if you need help assessing your current situation and working out how to move forward with different funding options. Call Julia on 07855275099 so that your business can stay afloat.