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:

• Running out of cash
• Not having contingency funds to deal with unexpected costs
• Reducing the value of the business
• Inability to take advantage of opportunities
• Reduced service/product quality
• And many more…

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 you out of excessive debt:

• Reduce costs
• Increase income
• Restructure liabilities
• Restructure assets
• Raise more capital
• Exit the business

The following examples in each area are not exhaustive, but may give the business owner some practical ideas.

1. 1.          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, etc..

1. 2.        Increase 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

1. 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 longer or scheduled payment terms with suppliers
• Replace existing loans with, for example:
  • loans that have a lower interest rate
  • secured ones (replacing unsecured loans) to reduce the interest rate
  • guaranteed loans (guaranteed by shareholders) to reduce the interest rate
  • repayments over a longer period of time
  • consolidated loans
  • shareholder funds
• Defer tax liabilities (this requires specialist tax advice)

1. 4.        Restructure Assets

Your ‘assets’ are all the things your business owns. This section on restructuring your assets also includes disposing of assets. Examples include:

• Sell unnecessary assets (eg: surplus/old equipment, cars)
• Convert necessary assets into liabilities: sell to a finance company and lease them back
• Factor invoices (this can reduce the asset value of the invoice, but raish cash)
• Use investments or cash to pay off loans.
• Collect your accounts receivable. Too many businesses have receivables running well in excess of 45 days. Your company is not a bank.

1. 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?

1. 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

This article is  contributed by AndrewD. Gregson B.A., M.A. M.Sc.(Econ) – Floodlight Consultant