As a business owner, managing your businesses finances is an incredibly important task and it’s very easy for things to go wrong. It can be difficult to determine when debt needs to be paid off or whether business debt can be useful in some instances. Taking too long to pay off business debts may appear harmless in the beginning but can result in all sorts of problems down the line.
Anybody starting a business will know that temporary debt is usually an unavoidable but necessary part of becoming a business owner. It is, however, important that you know when you should begin repaying these balances before you find yourself in financial trouble.
Businesses that have excessive amounts of outstanding debt may experience decreased cash flow within the business due to paying high interest rates, potentially holding you back from business growth and success. At Trinity Accountants we have put together a checklist for paying off business debts and avoiding financial hardship.
Consolidate your debts into one package
If you’re paying off several debts it may be useful to consolidate all of them into a loan or a product. This means you’ll continue to pay the usual amount whilst saving money on interest. If you have HMRC debts you’ll be paying interest daily, resulting in a large chunk of money going to waste when it could be going towards your debt.
If you were to invest the money that you save on interest payments into debt payments, you could essentially pay your balance off quicker. Please note that business and personal circumstances and all needs and objectives must be considered before undertaking any refinance approach.
Alternatively, you could reduce your monthly outgoings and spread the debt repayments over a longer period of time, in order to help with your cash flow.
Bounce Back Loans (BBL)
The Bounce Back Loan was one of the measures the government implemented to help businesses which were struggling as a result of the pandemic. Businesses were able to borrow up to 25% of their turnover to a maximum of £50,000, and the loans were unsecured and on generous terms.
The loans are interest free for the first 12 months and have a 100% Government backed guarantee. Once the twelve months are up, there’s an interest rate of 2.5% per year.
If you can’t yet afford to repay your Bounce Back Loan, the Pay As You Grow (PAYG) scheme could help:
- You can potentially delay repayments for six months after the first-year payment holiday. You don’t need to have made any repayment towards your Bounce Back Loan to do this.
- You can extend the term of the BBL from six years to ten years. This will reduce your monthly repayments, which could make a huge difference to your cash flow during this time.
- You can also ask to make interest-only payments for six months. This will reduce the amount of your monthly repayment for these months, while also ensuring you’re not paying any additional interest as you would if you took a payment holiday.
Invoice factoring is a type of invoice finance where you “sell” some or all of your business’ outstanding invoices to a third party to improve your cash flow. A factoring company will pay you most of the invoiced amount straight away, then collect the payment directly from your customers. Invoice factoring is also referred to as accounts receivable factoring or debt factoring.
Some clients use finance options from card transactions by taking a fee from the card payments. Card terminal finance is where you ask them for a loan, let’s say £10,000. The company will then take a certain percentage from each card transaction you receive, until the loan amount has been repaid (plus interest, of course). They will usually still have a monthly minimum. This essentially means if you have low sales one month, you will pay a lower amount of your loan back than if you had a high sales month, giving you some room for manoeuvre.
Restructuring Your Team
Many cases of restructuring to save costs involve downsizing. You may need to dismiss employees, remove departments, or close some of your locations. If you’re attempting to downsize you may also outsource some functions to save money. In other cases, restructuring could involve reassigning tasks. If you’re really struggling and looking to restructure your team, please speak to your accountant about restructuring people in your team before making any decisions.
Chase Your Debtors
Credit control is an important element of any business – no matter how large or small. Without an effective credit control process in place, cash flow can become an issue and you might find yourself unable to pay your own debts. We often find that it’s larger companies who are likely to make late payments. From the start of a client relationship, payment terms and conditions should be set out clearly and upfront.
It’s important to start chasing the debt as soon as it’s overdue. This lets your clients know that you don’t just let late payments go unchecked. You could also add late payment charges and interest to invoices to help with debt recovery costs.
Decrease Payment Terms
Making sure you get paid on time is one of the best ways to prevent future financial troubles. There are plenty of tactics you can employ, but we’ve found that having stricter and shorter payment terms has proven to be one of the most effective.
When you reduce the number of days a client can take to pay their invoice, you’ll get paid more quickly. Obviously, the quicker you get paid, the better your cash flow.
Having a shorter payment term also means you should have reserved cash to pay for the things you need to run your business. We recommend offering a 7-day term, as that way you should be able to cover your monthly expenses because you’ll know that you’ll receive money within 30 days, regardless of those late paying clients.
Set Up Automated Chasers
Effective credit control is simply – consistent, persistent, and polite payment reminders issued to your clients.
If you use software like Xero, it’s easy to turn on the automated invoice chasers and set up regular reminders. Xero will send a reminder for each invoice, so if a customer has 5 outstanding invoices, they’ll be chased for each one. Make sure your software is sending regular statements to late paying clients.
Also look at software like GoCardless, which is an online Direct Debit specialist that manages the entire collection process on your behalf, making it easy for your regular clients to pay you by Direct Debit and not rely on a person who could forget or not prioritise your invoice.
You could also offer incentives for early payments, to get the money in your bank that little bit more quickly. You can choose to offer a set amount off the invoice or a percentage discount – just make sure it doesn’t cut into your profit.
Extend or Use Your Supplier Credit Terms
When you use trade credit, you’re deferring payment to your suppliers as a means of better managing short-term cash flows. Obviously, this should always be done with their agreement.
Trade credit can end up hurting your business credit rating if you continually make late payments. If your suppliers report your poor payment history, your business credit score could suffer, making it difficult to get a future business loan for growth or in an emergency.
Only engage in trade credit if you’re absolutely sure that you’ll be able to honour all the supplier’s terms and conditions, and be careful not to lose out on any early payment deals.
Asset finance is a way to fund a business asset, for example a piece of equipment, vehicle, or machinery. You use the asset as security on the loan, and it’s often the most cost-effective way to fund new assets quickly. If you’re buying new, then consider using finance. If you already have assets, you could secure a loan on these. For advice about your specific situation, please speak to your accountant.
Business Payment Support
HM Revenue & Customs’ (HMRC) Business Payment Support Service is there to support businesses and individuals who are experiencing difficulties in paying their tax due in full and on time. This service is for customers who are aware that they may not be able to pay the payment due in full before the deadline. (Please note that even if you can’t pay in full you must send any returns in on time, or you risk paying penalties.)
HMRC are often helpful if you can’t pay in full on time, so we recommend speaking to them to explain your situation. If HMRC agree to allow you time to pay, they’ll ask you to set up a Direct Debit payment plan over the phone to make sure that you don’t miss any payments. If you don’t make the agreed payments, they’ll cancel the arrangement and take further action to recover the amount, so good communication with them is essential.
Covid Business Payment
Numerous schemes have been introduced to support businesses struggling with the effects of the pandemic. You can find out more about financial support by speaking to your accountant or checking the Government’s website.
Get Help From a Professional
There’s no-doubt that finance and debt can be a complex topic and one mistake or wrong turn can have far-reaching effects.
The key is to discuss your situation with an expert and if you’re experiencing difficulties paying off business debts, you should do something about it as soon as you can.
At Trinity Accountants we have vast experience in this area, and a friendly team who can help you. Just get in touch for an initial chat.