What can you do if your business is in debt?

Straightforward steps you can take right now to tackle and manage your business's debt.

It can be discouraging if your business is sinking into debt and, at times, you may find it difficult to deal with the situation.

The good news is that the very fact you're reading this article means you haven't completely lost your mojo and are determined to do something to try and resolve the situation.

Here, we've outlined some simple steps you can take to help you do just that.

Look your debts in the face

It's important that you don't just bury your head in the sand, but attempt to deal logically with the situation your business finds itself in.

First and foremost, you need to try and assess exactly how much debt you owe and to whom.

Some debts will be more urgent than others. For example, priority debts may include:

• business rates
• utility bills
• mortgage and rent payments
• tax bills
• payments to strategic suppliers
• bank loans
• any form of borrowing with a personal guarantee

Communicate with your creditors

You must keep lines of communication open with the people you owe money to. Explain to them the situation you're in and what you're doing to try and resolve it. They may even be able to offer advice.

If nothing else, it may reassure them. It might also help you in your negotiations over what you can afford to pay, over a specific timeframe. It may also make it less likely that they will take formal action to recover their debts.

Involve your directors and senior managers

If you have other directors in the business, you certainly need to make them aware of any serious situations involving debt. You'll need to lead by example, project confidence and try and find a way out of your difficulties. This is where senior management can show their experience and help you find a solution.

You'll also need to get your staff on board so that you're all pulling together. As one wise person once said, 'never waste a crisis'.

Seek expert guidance

There are various resources available to businesses that are struggling with debts. Always seek expert guidance as soon as you become aware there is a problem.

This article explains how to get free debt advice from a wide range of expert sources.

In addition, our Finance Hub has a section dedicated to providing useful information for businesses that are dealing with debt. Learn more about:

• repaying debt
• managing debt
• understanding debt
• improving your cash flow

Remember, the sooner you act, the more chance you may have to resolve the problem.

Yet you should also be wary of taking advice from people who lack either the experience or qualifications to advise you properly, such as unqualified accountants.

Improve cash flow as much as you can

There are a number of measures you can take to try and immediately improve how you manage your cash flow. You might also want to establish a 'cash culture' within your business.

These measures include the following:

• Cutting unnecessary costs
• Making sure customers pay on time
• Negotiating credit from suppliers (as far as you can without it damaging your relationship!)
• Carrying less stock

Of course, the best action will depend on your individual circumstances. If you have access to a qualified accountant, they may be able to offer valuable business advice - read more in our article, How an accountant can help manage your debt.

Explore ways to raise funds

Perhaps you can consider raising funds to pay down your debts? It certainly won't be easy, as a business free from debt is often a better investment proposition than one in financial difficulty. Still, you could explore the following:

• Borrowing from friends or family. Although this could put a strain on those relationships.
• Liquidating assets. Creditors may accept this as they'll want to be paid at least something, and they would stand to obtain more than if you wound up the business.
• Looking for a new cornerstone investor. If your business is just going through a rough patch and is otherwise viable, this may be an option worth looking into. However, the investor will quite likely demand a large equity stake in your venture.
• Peer-to-peer lending or equity crowdfunding. These are worth exploring if you either want to raise debt at a set interest rate over a pre-determined period (via peer-to-peer lending) or sell a stake in your business via equity crowdfunding. Before proceeding with either of these options, however, you should seek independent financial advice.

Find an insolvency practitioner (if you need one)

If it looks as if your business is unable to remain solvent, you may need to consider closing it.

To close a limited company with debts, by law you'll need an insolvency practitioner. However, insolvency practitioners aren't just involved with liquidation (the equivalent for a partnership or sole trader is bankruptcy) but are skilled at turning businesses around.

If you think you need one, seek a firm recognised by one of the professional bodies, and with relevant experience in your sector.