Nic Redfern, Finance Director at Know Your Money, offers Finance Monthly his advice for businesses ensure stable debt repayments.
It has been a hugely volatile year for UK businesses. The coronavirus pandemic has caused unprecedented economic turbulence, which continues to threaten many companies, as well as the job security of millions of employees.
Despite the Government putting in place substantial support packages to help businesses weather the storm, employers are still plagued with uncertainty. Indeed, 46% of businesses have seen demand for their services fall due to COVID-19, according to a recent survey of over 530 businesses conducted by KnowYourMoney.co.uk.
The research also showed that, with sales declining and cashflow issues rife, over a third (38%) of UK companies have taken on more debt in 2020. Of course, taking on debt can be beneficial to businesses – it can support growth or ensure survival – but failure to effectively plan for repayments can pose some serious problems in the future.
Unfortunately, planning for the future is hard at times like these. In fact, according to KnowYourMoney.co.uk’s study, over half (56%) of British businesses are struggling to make any long-term financial plans due to the uncertainty surrounding the pandemic. The fact a second lockdown has been announced since this survey was conducted will likely have made matters worse.
However, even amidst such disruption and uncertainty, there are steps that can be taken to help businesses get to grips with their debt repayments.
Take an inventory of the debt
Firstly, business leaders should make a note of all their debts. These will range from large repayments such as business loans and lines of credit, to smaller expenses, like business credit cards. This process will help employers understand which debts to confront first and where cuts can be (or need to be) made, thereby simplifying the repayment process.
Of course, taking on debt can be beneficial to businesses – it can support growth or ensure survival – but failure to effectively plan for repayments can pose some serious problems in the future.
In most cases, it is beneficial for businesses to prioritise repaying debts with the highest interest rates. This is because the longer it takes to pay off high-interest debts, the more a company will end up paying in the long term; tackling this debt early on will help to reduce long-term expenditure.
This exercise is particularly important for small and medium enterprise (SME) businesses, as they tend to face higher interest rates and shorter repayment timeframes. This is largely because UK SMEs’ cash-to-debt ratio has been declining over recent years, meaning they find it harder to keep up with debt repayments. So, organising debts as early as possible will certainly help such smaller firms to avoid late payments, which could jeopardise their survival.
Choosing a debt reduction strategy
Once the debt inventory has been completed, employers can look to develop a sustainable debt reduction strategy. The most basic form of debt reduction is the spartan approach. This involves the business limiting their spending to the bare necessities until the debt is repaid. However, this hard-line strategy might not give businesses the flexibility they require to run effectively.
Another popular option for businesses is to refinance debt. This typically means taking on a new loan in order to pay off existing debt. It can be a way of consolidating multiple debts into one manageable repayment, or to secure a lower interest rate. This is a particularly useful strategy for business owners with a good or excellent credit score. However, consolidating debt, even at a lower interest rate, can cost you more in the long term if you extend the term of your loan(s).
That said, refinancing a loan can come with complications; for example, some lenders may impose penalties on businesses who fully repay their debts earlier than agreed. Thus, employers should read the terms of existing loan agreements, before committing to this strategy.
Employers must also develop a sustainable budget and identify where savings can be made to finance repayments. This may seem like an obvious step, but some businesses may be unsure where to begin.
A good starting point would be to review which office equipment is not used as often as it could be; for example, laser printers or seldomly used office furniture. Employers could look to sell-off such expensive items. Additionally, they may consider purchasing second hand items in the future or shopping around for cheaper suppliers; it may not seem like a big step, but employers may be surprised by the savings they could make in their operational costs.
Alternatively, businesses owners might consider moving to smaller premises where rent and utility costs would likely be cheaper. Indeed, moving to co-working spaces, or even making the move to permanent remote working could present scope to make further savings.
Of course, no two businesses are the same and certain cost-cutting measures will suit some more than others. So, employers should take their time when assessing their outgoings to understand which cuts, they can make without endangering the business.
Seek advice when needed
These are trying times for businesses everywhere – even for some of the largest and best-prepared of corporations – and, at times, getting the organisation’s finances in order might seem like an insurmountable challenge. In many cases, therefore, I would recommend that business owners seek further advice.
Depending on the needs of the particular organisation, owners might look to business consultants, accountants, specialised credit counsellors or financial planners for some more focused assistance. These experts are able to assess all elements of an organisation and develop a tailored strategy to suit the businesses specific needs. Especially during difficult economic periods when businesses might seek to pool their resources, this can be a great source of help when navigating debt.
All in all, business owners should remember that they do not have to weather the storm alone. With sound advice and perseverance, companies should be able to lessen their financial burdens, and find a workable and personalised repayment strategy.