Options for raising finance and getting out of debt for small businesses
Whilst parts of the economy are rebounding from the recession, banks currently still only approve approximately a quarter of small business loan applications (stagnant amongst institutional lenders, whilst approval of loans for medium/large business has increased). High street banks are no longer your only option, and many small businesses are investigating other avenues.
Traditional banks are built to service large businesses; their systems and processes are designed to assess risk in terms of big business. Data gathering is largely from three main credit reference agencies, who more often than not do not hold sufficient information on a small business, therefore giving them an “adverse” rating based on a lack of information rather than anything specifically negative.
Banks will also often use a small business owner’s personal credit rating as a symbol of the business’s risk – the scoring methods are generally designed for either big businesses or individual consumers, leaving banks forced to try and apply their template for individuals to a small business, leaving the business owner jumping through hoops, trying to provide information that isn’t always that easy to obtain.
Three alternatives that small businesses are considering are:
Very similar to bank loans, but with a much more streamlined product. They typically have less stringent criteria in terms of revenue, age of business and credit rating. They also usually offer a much swifter speed of response, with less touch points in the application process – many being assessed with a decision provided instantly.
This online pitching asks small business owners to convince others that their companies are worth investing in. Crowdfunding asks people to invest in a particular business, product or campaign, but the funds often don’t need to be repaid directly. Many businesses will offer a free or reduced cost version of the item they were raising funds for, or alternatively a percentage of future revenue.
Whilst this is a product that has been available for many years, historically it was seen as a product only used by struggling businesses. Today, it is the first choice for many to assist with day to day cash flow requirements, and can even include bad debt protection in order to protect your business against potential non-payment from your customer, and also chasing of debt if required. In basic terms, the Invoice Finance company will purchase invoices form you at a discounted rate, and make a level of funding available to your business as soon as an invoice has been issued, even though payment terms may be up to 90 days or more. The remainder of the funding is provided to you once the invoice has been paid in full.
Tips for getting out of debt
Whilst a certain level of debt is to be expected when running a small business, too much debt can very swiftly lead to running out of cash, and the end of your company. It acts as a weight on your shoulders, holding you back from accomplishing the general day to day tasks of running your business. Serious debt is something that slowly creeps up on many business owners – if you find yourself in this situation, you are not alone.
Something that many business owners want to understand at times of financial difficulty is liability; what debt is exclusively for the business, and what (if anything) am I personally liable for? Whilst there is no simplistic answer, you should be able to determine which business debt can affect you on a personal basis.
To start with, if you’re operating as an unlimited entity (sole trader, independent contractor and certain partnerships), you and your business are considered legally to be the same thing. You owe every single penny that your business cannot pay, meaning that creditors can come after your personal assets, if business assets are not sufficient to settle any outstanding debt.
The slight difference with partnerships which is often misunderstood, is that all partners are 100% liable for any business debt. Because of this, creditors can take money from any combination of partners. This means that if none of your partners have assets, creditors can seize 100% of the debt from you.
The benefit of operating under a Ltd company or LLP, is that you and your business are considered separate legal entities. Creditors cannot touch your home or personal assets. Lenders are obviously aware of this, and will often ask for business owners to sign personal guarantees, promising that you will satisfy the debt if the business is unable. If you’ve signed any personal guarantees, you are in fact liable (to some degree at least).
There are some other unique situations that could make you liable for personal debt, but this covers the most common issues. Regardless of whether or not you’re personally liable for your small business debt, it’s smart to start thinking about ways to dig yourself out.
Getting yourself out of business debt really isn’t all that different to getting yourself out of personal debt – you have to find a way to spend less than you earn, and put any remaining funds towards repaying debt. Here are 6 tips to help you in the right direction:
Check your credit report
It is impossible to tackle any issue if you don’t first have all of the information and understand the facts. Look for any glaring issues, and settle them if possible. It is a good idea to obtain a personal and a company credit report if applicable.
Start with the smallest debts first
Contrary to the traditional route of ranking debts from highest to lowest in terms of interest rates, list them all from smallest to largest. Paying off debt can be as much psychological as anything else, and if you fail to see results, you are likely to give in. Once you have ranked your debts, start chipping away at them – smallest to largest. You will see some immediate “wins”, giving you the motivation you need to keep going.
Negotiate with creditors
Try and look at your debt from the perspective of your creditor. We’ve all had clients or customers owe us money in the past and know how it feels. At some point, you begin to see the debt as a loss and assume you’ll never see it. If that client were to contact you months later and offer a smaller amount, you’d likely accept. The same is true of your business debt – if you cannot afford to repay in full, negotiate with your creditors. They will also need to take into consideration the cost of chasing you for payment, along with the chances of receiving payment in full. Ensure you have an open and honest conversation about your situation for the best results.
Hire a friend or relative
Unless you can find a way to swiftly and significantly increase your turnover and profits, you’ll have to focus on cutting costs in order to repay your debts. You can do this in a variety of ways, but one option if to consider hiring a friend or relative.
This can only work in certain situations, and can likely only be a very short term solution, but can be extremely helpful when it does. Assuming you have a friend or relative that has the relevant skills, instead of hiring someone as you usually would, you hire your friend and pay them a percentage of the going salary. Your friend earns some extra cash, and you save on outgoings. You obviously need a close friend that is willing to sacrifice their time to help you, but don’t be afraid to ask.
Chase up any late paying customers
If you have any customers of your own with unpaid debts, now is a good time to chase them and collect what is owed. As mentioned above, you may be willing to settle for a percentage of what is owed if that means collecting a debt you are confident you will not receive in full.
Sell off assets
Spend some time thinking about your business and its processes – are there certain things you could do differently without impacting the quality of goods or services you provide? You might find that you can sell a piece of expensive equipment and buy a cheaper used version for example.
Whatever you decide to do, do not bury your head in the sand – debt can snowball quickly, and if you ignore calls from creditors they will assume you either cannot pay, or do not want to work with them to pay, which may cause them to commence winding up proceedings against your company.