Business debt can be a good thing. It can help you to establish your business, fund growth or invest for the future. However, if the level of borrowing becomes excessive it can lead to many problems, such as:
- Servicing the debt drains away all the cash
- no free cash to deal with unexpected costs
- debt unbalances the balance sheet reducing the value the business
- no cash to take advantage of opportunities
- Reduced service/product quality
This article gives a framework and various practical ideas to help you reduce your business debt.
A framework for recovery
There are six basic strategies that can help a business get out of excessive debt:
- Sell assets
- Increase income
- Restructure liabilities
- Reduce costs
- Raise more capital from investors or partners
- Exit the business
The following examples in each area are not exhaustive, but may give the business owner some practical ideas.
1. Sell Assets
Your business may be able to conduct business normally without that extra forklift or truck. You may have a mortgage on your building and selling the building will reduce the debt and cash flow requirements.
2. Increase Your Income
There are various ways of increasing the amount of money flowing into your business, such as:
- Increase sales
eg: through increased marketing, cross-selling to existing customers, offering special deals to get additional or advance orders, getting referrals with other organisations/affiliates
- Raise your prices. This is easier than it sounds but if a price rise is not accompanied by a hard look at value pricing, then it will frighten existing customers.
- Find alternative sources of income
eg: renting out unused office space, assessing your waste or unused products and seeing if it has any value., obtaining commissions from other organisations
3. Restructure liabilities
Your ‘liabilities’ are all the amounts of money that you owe to other people. Restructuring your liabilities doesn’t necessarily reduce the overall amount you owe, but it can give you more cash, more disposable income and/or reduce the amount of debt you need to provide working capital.
Examples of ways that you can restructure your liabilities to reduce your debt include:
- Negotiate temporary longer or scheduled payment terms with suppliers
- Replace existing loans with, for example:
- loans that have a lower interest rate
- guaranteed loans (guaranteed by shareholders) to reduce the interest rate
- repayments over a longer period of time
- consolidated loans
- Defer tax liabilities (this requires specialist tax advice)
4. Reduce Costs
There are two principle ways to reduce costs:
- looking for big savings, or
- make small reductions across the board
To find big costs savings, concentrate on large savings first. Can you reduce rent by moving? Or cutting staff hours? To make savings across the board, set a savings target (say, 10%) and reduce each budget by that amount. Then take small steps to reduce costs, eg: reduce communication costs by going to prepaid cell phone cards or opting for cheaper equipment when purchasing, for example
5. Raise more capital
You can raise more capital by:
- finding more investors, eg: venture capitalists
- issuing more shares to current investors
- obtaining grants
Also, take a look at your asset list and assess whether it can be converted into assets of greater value. For example, if you own land, can you build more offices or houses on that land?
6. Exit the business
To exit the business, options include:
- Selling the business as a going concern
- Going into receivership
- Selling off all the business assets (including the business goodwill, eg: the client base) and using the proceeds to pay off the liabilities.
Andrew Gregson is a Senior Partner with Floodlight Business Solutions (www.floodlight.ca), a turnaround company that supplies specialist advice on rebuilding sales and reducing debt.