The pressure on UK businesses has been relentless throughout 2020. The coronavirus pandemic has created unprecedented economic volatility, which continues to laud over companies.
Efforts have been made to protect as many jobs as possible, with the Government producing various support packages to help businesses stay afloat. However, many businesses are still struggling; according to a survey of over 530 UK business leaders conducted by KnowYourMoney.co.uk, 46% of companies have seen demand for their services fall as a direct consequence of COVID-19.
Consequently, over a third (38%) of UK companies have taken on debt to ease cashflow issues, according to KnowYourMoney.co.uk’s aforementioned research. Taking on debt is by no means a bad thing, of course, however companies could face serious financial issues later down the line if they fail to create a sustainable repayment plan.
Positively, however, steps can be taken to help companies get to grips with their debt repayments.
Conduct a debt inventory
Firstly, employers should make a note of everything they owe. This could range from large payments such as business loans, to smaller expenses such as credit cards. Doing so will help employers to prioritise their debts, which will in turn simplify the repayment process.
Usually, businesses will prioritise high interest debt repayments. For small and medium enterprises (SMEs) this is particularly important. British SMEs tend to face higher interest rates and shorter repayment timeframes, because generally speaking, the cash-to-debt ratio has been declining in recent years. This has meant that such companies are more likely to fall behind on debt repayments.
That said, it would be beneficial for most businesses to tackle high interest debt; doing so will ensure that a company will not be paying more than they need to in the long term.
Debt reduction strategies
Once an inventory has been taken, organisations can then move on to decide the most appropriate debt reduction strategy for them.
For some companies, the simplicity of the spartan approach will be ideal. This strategy entails cutting all spending except the bare necessities until the debt has been repaid. However, this approach can be inflexible, which could hinder the day-to-day running of the business.
Alternatively, refinancing debt could be a valid option, particularly for business owners with a good or excellent credit score. This approach typically involves taking on a new loan to pay off existing debt. There are two key reasons for this approach. Firstly, it will mean that businesses are able to consolidate their debt into one manageable repayment. It can also be used as a method of securing a lower interest rate.
However, securing a lower interest rate does not guarantee that the loan will be cheaper in the long-run, especially if the term of the loan is extended. Additionally, some lenders impose large penalties on companies who repay their debt early, so it is important to read the small print before committing to this strategy.
Scope for savings
Once the debt reduction strategy has been agreed, employers can then assess their budgets and identify where savings can be made to finance the debt repayments.
A good place to start will be reviewing the company’s office equipment and determining if any elements can be sold, and whether they can be replaced with cheaper models.
Additionally, the office space could be brought into consideration. Employers might consider moving to smaller spaces or co-working areas with cheaper rent. Alternatively, they may even consider abolishing office working altogether and make working from home a permanent fixture.
Of course, different businesses will have different needs, and this must be factored into the final decision.
These are extremely challenging times, and businesses must never feel that they have to guess the best course of action, when managing debt. In fact, there are a plethora of specialist experts available, who are on hand to help employers get back on track with their repayments.
From business consultants to financial planners, there are specialists available to assess every aspect of a company’s financial situation and help them to develop a tailored strategy to effectively manage their debt.
It is important to remember that debt is not inherently bad for businesses. On the contrary, it can help to safeguard the survival of a business, and even help it to grow. The key is to develop a sustainable financial strategy as early as possible, to ensure that the company does not suffer from late payments.
Nic Redfern is Finance Director for KnowYourMoney.co.uk. Run by a dedicated team, Know Your Money and NerdWallet’s goal is to provide clear, accurate and transparent comparisons for a wide range of financial products, such as business loans, mortgages and car insurance.