Small businesses account for the backbone of our economy. In the US they are the focal point of an economic debate for which the country’s future leaders aim to deliver a path to prosperity, based around an economic model encapsulating freedom. The UK shares a similar appreciation for small business as George Osborne consistently promotes small business lending schemes, and the removal of red tape is followed by a larger public debate on the role of the banks and their current lending strategy. One thing that has increasingly become clear, despite the public initiative and media engine, is small businesses are struggling and slowly accumulating larger debts as they seek to wear out the economic downturn.
Having previously worked for small businesses trying to facilitate a pipeline of business from a standing start I can recognise the greater financial expectations placed upon business owners against a drop in consumer spending and a stagnant expansion across key core industries. This economic cauldron also provides personal liability for stakeholders and senior partners that prop up the business with their personal wealth, preventing exception from personal liability. Return of investment is no longer a guarantee on key commercial projects and the UK records of £154 million increase every day. Small business owners play a part in this when aiding their business finances with movements towards the personal credit card.
Although the increase in numbers can appear a formidable prospect not all debt is necessarily bad debt in itself. A level of operational debt may be needed to provide your business with the platform to succeed. For example, taking out a loan to compensate a new office’s opening will almost certainly be valuable 6 months later when the revenue increases. The critical point with business debt is to be in control, accepting an operational level for rational business decisions whilst avoiding high interest payments from poor sources of lending. Key operational figures must also learn how to separate the Business and Personal performance as the relationship between stress and debt levels can affect your ability to engage clients, make decisions and maintain a positive company reputation.
Here are the key issues and recovery options available.
- No business contingency fund. When an emergency happens, there is a reflex movement to poor credit.
- Excessive borrowing to compensate for business cash flow issues.
- Lack of Stakeholder Confidence.
- No investment.
- Quality of Service Deduction.
Path to Recovery
Cost Reduction Strategy – Big savings can be made through a variety of methods. Reductions across the board can be made through areas, such as transport and purchasing equipment. Try to target 10% of savings for different departments.
Income Generation – A business will have its own bespoke methods to increase income in its niche, although popular general methods include cross-selling to different customers and offering incentives to undercut market competition. Whilst referrals from industry contacts are also a key aim, why not think outside the box such using Google Adsense on your website and renting any additional office space.
Restructuring Liabilities – Can you replace existing loans with lower interest loans? Try and restructure debts so that a level of disposable income becomes available. Secured loans are also a ways of keeping interest payments down.
Acquiring Business Capital – Preferred options should include the acquisition of new investors, venture capitalists and research into government lending schemes and grants. Also assess your own asset list to consider possible business opportunities available.
Restructuring Assets – Surplus equipment can appear in the form of used cars, machinery and IT products. Chasing outstanding invoices is also a legitimate method of securing the finance you’re owed.