Debt of a reasonable quantity can be healthy and valuable for driving business growth, but excessive debt can be a burden and severely constrain organisational expansion. If your business has a mounting debt load and you’re worrying about things getting out of control, you should act quickly to work out what your options are for reducing the debt.
Seek professional advice
When it comes to getting your business out of debt quickly, it’s vital to seek professional advice as soon as possible. Experts such as business turnaround experts, insolvency experts, and other debt professionals – in addition to your accountant and financial advisors – can all help you with exploring your options.
You might get invaluable advice on adding product streams to boost revenue, or if the situation is dire, advice on how you can proceed to other options such as voluntary administration and liquidation.
Know your options and obligations
Understanding your options and obligations is an essential step to getting out of debt. Speak with your advisors about your options and make sure you understand the advantages and implications of each option. As a sole trader or partnership, you might be able to enter into a debt agreement or personal insolvency agreement if the situation is serious.
As a company with a significant debt load, you might consider options such as voluntary administration or liquidation, and you could be facing the prospect of receivership.
- Voluntary administration – Company directors appoint an external administrator to manage the company and decide on the best outcome for creditors. The business can end up being liquidated, entering a deed of company arrangement, or go back to the control of directors.
- Liquidation – The company is wound up and the proceeds from assets paid to creditors.
- Receivership – A secured creditor appoints the receiver to take control of some or all company assets so that the creditor can be repaid.
These options involve appointing an external administrator to help pay off debt and they can result in your business being wound up. Acting quickly by consulting with an insolvency expert is important for giving your business the best chance of survival and because of laws that prohibit insolvent trading.
Know how you’re using your debt
As you consult with your insolvency advisor and your accountant, they will give you a better idea of exactly how you’re using your debt and what’s happening with the size of your debt. They can help you review your books for the past year or more to give you a clearer picture on how and why your debt has ballooned, and what accurate debt projections for the coming year might look like. These insights can facilitate a more effective budget and plan for turnaround where turnaround is a feasible option.
Create a business budget and plan
You can also work with your advisors to create a business budget and debt-control plan. This is effectively a financial management planning strategy to limit your organisation’s dependence on debt. Your budget and plan should detail everything from outgoings and projected income to periodic debt repayments.
Initiate cost-cutting measures
Even as you undertake efforts to stop relying on debt to fund growth, you should be looking to reduce debt by cost cutting. While cost cutting often means reducing staff levels in businesses, this is not always possible if you need to sustain production and service output. You can look to other options for cost cutting, including switching to renewable energy such as solar panels, enforcing conservation around the workplace, going paperless, and moving to cheaper premises.
Boost business-development spending
The higher your sales and revenue, the more profit you’ll have to pay down debt. Consider how you can boost business-development outcomes by investing in more BD roles and tying remuneration to outcomes delivered. Spending smart for marketing campaigns can also help you generate more sales for the same amount of investment.
Explore other streams of income
Sometimes getting into debt can become a great motivator for businesses to pivot and change according to market conditions. Consider introducing other streams of income that are complementary to your business and won’t require incurring more debt. Examples could include bundling services, licensing a product or service, or developing paid workshops and events. You could even lease out unused office or warehouse space that would otherwise remain unoccupied.
Offload unused assets
If you have assets that aren’t being used, one option is to sell these for a windfall to pay off some or all of your debt. Review everything your business owns and consider selling any assets that are not being used. These assets could be plant machinery and equipment, old stock, or even office furniture.
Managed effectively, debt can be your business’s best friend and support you in growing more quickly. However, when debt gets out of hand, you should seek advice in a timely manner. In some cases, you may need to consider more drastic options such as voluntary administration and liquidation to resolve your debt issue.