Most businesses have debts. In fact, it’s impossible to launch some businesses without borrowing money. The important thing is making sure that these debts don’t spiral out of control. If your debts become too large, you could eventually struggle to pay them back, which may eventually lead to your company going bankrupt.
There are a few things you can do to protect yourself from debt problems. Below are just 6 measures worth taking.
Learn how to budget effectively
Budgeting is essential for preventing unwanted debt. This involves tracking how much your business is earning and how much it is spending in order to maintain a healthy cash flow and profit. Many debts such as arrears from missed bill payments are often the result of poor budgeting.
Start by estimating your monthly expenses. On top of fixed monthly bills that you can easily predict, allow some room for planned one-off expenses (like buying new equipment) and surprise expenses (like repairs).
You should then try to forecast exactly how much you’re likely to make each month. This should be enough to cover all your expenses and provide a profit. If it’s not, you may need to cut back on certain expenses.
Build some business savings
It can be worth contributing some money each month or each week into a savings account. This could be money that is used specifically for unexpected emergency expenses like machinery repairs. Being able to rely on such savings can prevent you from having to take out emergency loans. You should try to save up a few thousands dollars.
You could also consider saving up for goals like being able to expand your team, renovate your office or redesign your website. This can prevent you from having to take out loans, which could just be adding to your debts.
Follow up late paying clients
When clients don’t pay you, it can affect your ability to pay your own bills. As a result, it creates a chain reaction of debt.
Make sure that clients aren’t allowed to get into a habit of paying you late. Keep track of when clients are meant to pay you and chase up late payments immediately. If possible try to avoid late payments occurring in the first place by credit checking clients before taking on regular payments and sending payment reminders before payments are due.
Shop carefully for loans and credit options
When you do need to borrow money, make sure that you’re not just opting for the first loan or credit card that you can find. It’s important to shop around so that you can find out what your options are. Think includes checking banks and private lenders.
Where possible, try to stick to loans with fixed rates and low interest. High interest variable loans and credit cards can be more expensive and more difficult to budget from month to month.
Switch to a limited company
Legally separating your business from yourself can help you to separate liability when it comes to business debts and personal debts. If you are a sole trader, you may be required to pay personal funds or have personal assets seized in order to pay off business debts. If you have a limited company, only business funds and business-owned assets can be used to pay off your debts. Similarly, only personal funds and personal assets can be used to pay off personal debts.
You can use a company registration service to set yourself up as a limited company. This generally doesn’t cost too much and can help to make your business look more official.
Know when to seek out debt relief
If you get to a point in which you are struggling to pay off debts, consider whether it’s time to seek out debt relief. There may be ways of reducing debt or making it more manageable.
If you have lots of individual debts, you could consider consolidating them by taking out one large loan. There are companies that can offer low-interest consolidation loans for businesses.
Another option could be to hire professionals to help you negotiate new debt payment rates. This could make it much easier to keep on top of debt payment from month to month. Such services are often known as debt settlement services.
Bankruptcy is often seen as a last resort option. Most businesses do not survive bankruptcy, however are able to rebuild afterwards. If you are thinking of declaring bankruptcy, it’s worth talking to a debt advisor – they may be able to help you explore alternative options or find ways to reduce the financial impact of the bankruptcy.