Risk and debt are natural when setting up a new business. Panic not; debt is not always the ugly sister. You can create a ‘good’ debt balance to keep a healthy cash flow forecast as a savvy business owner. 
You may, for example, borrow money to start up or launch the products until the sales start rolling in. You can even raise investment to cover operating expenses, such as hiring a team to drive business. However, cost control and debt management must be part of a strategic approach. 
How to reduce business debt effectively 
Poorly managed debt will determine the success or failure of your business. You must ensure that costs and debts do not spiral out of control. A passive approach to reducing debt can lead to irreversible consequences and affect the business's credit status. 
The good news is that there are proven techniques to reduce business debt effectively. 
Reassess your budget 
Managing small business debt can start with reassessing your budget. Perhaps some costs are higher than expected, or you’re struggling to pay bills? It’s OK; you just need to review your current financial situation honestly. 
Look at previous finance plans and your forecasted budget. These documents should list all income streams, variable costs and fixed expenses. Pull these together alongside your cash flow budget, profit and loss, loan repayments, tax bills and any dividends payable. 
Decide upon a debt reduction strategy 
Once you have a deep understanding of your budget, the scale of the debt, timescales and the cash flow situation, you need to decide how to tackle it.  
This process involves readjusting expenses or planned investments to fine-tune your budget despite the anticipated cost increases. 
Renegotiate the debt - You could agree on more favourable rates for early contract renewal and no termination fees. 
Apply for grants - Some regional or charitable organisations offer grants and loans that don’t need to be repaid under certain circumstances. 
Change your terms and conditions - Review your payment terms at your discretion so that income arrives in your bank account sooner. 
Reduce your expenses 
Cutting costs is an obvious way to improve the bottom line. Think about where you can sensibly reduce your largest expenses and outgoings. 
Some cost reductions may simply cut wasted money. For example, your business may be leasing empty storage space or expensive offices. Regularly reviewing outgoings can prevent the accumulation of business debt as best practice. 
Redundancy can reduce the wage bill, although financial packages do add up. Flexible labour costs to keep the business running are also often more costly in the long run. 
Consider carefully cutting any expenses that can contribute to income. New business could dry up if you slash investment into marketing. Likewise, less staff in customer service could lead to more dissatisfaction and lost customers. 
Any costs must be reduced strategically rather than as a knee-jerk reaction. 
Keep communicating with creditors 
Be honest with your lenders, and explain the difficult financial situation. 
All lenders will understand how businesses can fall on hard times and, therefore, may be open-minded to recovering their debt. After all, a debt paid later than expected is still better than an unpaid one. 
Through open and honest communication, you may be able to renegotiate an extension, reduce admin fees, lower late payment rates, or amend the repayment schedule. 
Create a "get out of debt" timeline 
Work out the timescales of when you can realistically expect to reduce the debt. As part of your timeline, include the list of everything you owe and which need to be paid off first. Break down the amount owed, interest, and any loans that could be consolidated. 
Once you have the debt schedule, calculate what you can afford to pay and by when. To raise capital, look to liquidate assets or acquire new investors willing to bankroll the business. Make sure that you avoid getting into more debt going forward. 
When it is time to declare bankruptcy 
If your business debt becomes unmanageable, it may be time to file for bankruptcy. Bankruptcy is a legal status for people who cannot repay the monies owed. Creditors can also apply for bankruptcy if you owe £5000 or more. 
Bankruptcy can offer the end to your debt problems but can seriously impact your life. If you're self-employed, your business will be closed, and your employees can claim unpaid wages, holiday pay and redundancy during the bankruptcy process. 
It is worth noting that depending on the status of your business, your home and other assets may be seized. 
Once you have declared yourself bankrupt, you can start trading again, but you’ll have to follow certain rules. 
Contact us today to find out how we can help you! 
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