How to Avoid Debt for Your Small Business

Finding yourself in debt can be scary for a business. As an owner, unmanageable levels of debt can put both you and your business at risk. And ignoring that debt is the worst possible mistake you could make. No matter how bad it seems, there are always options to help you resolve the situation.

If your business is currently struggling with debt, this article can help. Read on as we cover the 5 steps you can take on your journey towards managing your debt and being able to breathe easier again.

1. Understand you can’t control everything

Risk is simply part of running a business. You can’t easily plan for recession, pandemics, natural disasters or other negative events, because if you take a too-cautious approach then you’ll never succeed. But you can be realistic about your business, and keep track of potential risks.

Be aware of the trends and developments in your industry, and make changes within your business to focus on growth in a sustainable way. If the worst happens and your debt levels become a problem, you do need to deal with it and take action – don’t just sit back and hope it will go away. It won’t.

If your debts are spiralling out of control (or you suspect they may be), take action today. If you fail to make payments on your debts, the consequences are often disastrous. Loss of employees, destroyed credit ratings, seizure of stock, costly court cases brought by your creditors — it’s all on the table. Sometimes all at once. And, in the worst-case scenario, business closure and bankruptcy.

2. Identify your priorities

If you find yourself struggling to keep up with all of your bills, stop trying to keep up with all of your bills. Start by looking at what you owe and prioritising the most important bills. Your priorities will depend on the type of business you run and how flexible your suppliers are willing to be.

For most businesses, the top priority is pretty easy: the Australian Taxation Office. To address any tax debt owed, contact the ATO and discuss a payment plan. If possible, do this before the bill is due. The ATO is surprisingly tractable in recognising the reality that businesses can find themselves in financial difficulty due to challenging economic conditions or unexpected events. Even though they are not to be trifled with, ATO representatives are sympathetic to these situations.

To help manage tax debt, the ATO can provide tailored assistance and payment plans — and reduced interest in some cases — to help you meet your obligations in a way that takes your personal circumstances into account. If you’re a sole trader with a tax debt of less than $100,000, you can set up a payment plan by going directly to www.ato.gov.au/businessdebt and using the ATO’s online service.

The order of the rest of your payment priorities is for you to decide, but here are some suggestions:

Payroll: If you don’t pay your employees’ wages on time, you may be penalised. You may be able to renegotiate contracts with some staff, but bear in mind that’s likely to affect their morale. Some may quit.
Suppliers and business partners: Avoid losing valuable goodwill with your most loyal suppliers and business partners.
Aged payables (60 days or more): If you don’t pay, your credit score will be impacted, which will affect your ability to borrow money in the future.
Bills: Outgoing costs such as rent and utility bills need to be paid to keep the lights on! And again, not paying these could affect your credit rating.
Secured debts: If you run your business as a sole proprietor or partnership, you might be held personally liable for debts, and creditors could try to take your assets. Work hard to head off that eventuality.
Insurance: This is not the time to skimp on protections, especially professional indemnity and public liability cover.
Credit cards: There’s a reason the product descriptions for credit cards are so long: there are all sorts of penalties and charges that can pile up quickly … and that’s on top of the interest.

3. Renegotiate, refinance or consolidate bank loans

Once you’ve made the decision that you need to make structural changes to deal with your business debts, the first step is to consider your loans. You may be able to renegotiate your bank loan so it’s spread over a longer term thus reducing the interest payments and also the monthly repayment cost.

The bank may want to charge a higher rate due to the perceived increased risk of default, so you won’t save as much money as you might like. Even so, this can give you some breathing space.

You may be able to combine your business loans into one payment that will reduce monthly costs and not adversely affect your credit score. At the very least it’ll simplify the admin stress. If you are considering this option, talk to debt-consolidation companies about and read the small print carefully. Also consider refinancing if your credit record will allow it.

4. Boost your business sales

A surefire way to help avoid debt is to boost your sales to bring in more income. You could try taking actions such as:

offering a sale or discounts
adapting your business model
offering a new range of products
expand into different markets.

Increasing your income will help ease the debt burden. If you can’t increase your income through new clients and increased sales, then consider other options like liquidating any assets you own and potentially looking for new investors into the business. You should do as much as you can to keep the business running, but if the worst comes to the worst, you might have to close it down or put it in mothballs.

Alongside these steps, make sure your systems for accounts receivable are up to scratch. For example, it can be as simple as instilling quick follow-ups for late payments from customers. Presenting your clients with discounts for paying fees upfront is another method to improve your cash flow.

5. Reduce your business costs

You should also look at areas where you could cut business costs, for example:

Do you really need to rent an office or can you operate from home?
Think about your wages bill: can you cut down on staff?
Review your operational expenses (which you should be doing regularly anyway) and see if there are savings you can make.
Try negotiating with your existing suppliers for a discount, or using new ones.

By talking to all your creditors and explaining the situation, you may be able to negotiate terms. Go to them with a comprehensive plan for resolving your debt situation. Stay positive. Tell them you want to pay in full but need to renegotiate terms for that to happen.

You may find they understand that it’s in their interest to accommodate your request. After all, if your business fails they’ll get nothing back. By being proactive and approaching your creditors before they start chasing you for missed payments, they’re more likely to take you seriously and agree to your terms.

With the creditors placated, you’ll find that cutting costs may be the fastest way to increase your cash flow and chip away at your liability. This is something to do before resorting to drastic debt-reduction measures. You want to make sure you don’t cut back too much, because you don’t want to destroy your business in the process of paying off its debts. After all, closing the business down will leave you with no income at all, which is definitely not going to help the matter.

Take control of your debt and thrive

Whatever happens in managing your business debts, make sure you take action to resolve the problems as quickly as possible. Debt won’t go away overnight – you need to take control and explore all your options. Winning this fight is often an incremental thing. A grind.

Being in debt can be scary, but allowing it to get away from you is worse. So talk to us for help and advice in getting your business out of debt, and setting yourself up for a better future.

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