5 tips to deal with small business debt

This article is sponsored by Vero Insurance

Even the most robust company experiences lumps and bumps in cash flow. Here’s some proven ways to get your business back in the black.

Cash flow is the key to the health of any business. But even successful small businesses slip into debt from time to time. Here are some tips that could help take the pressure off.

Revisit your business budget

Face the financial facts before attacking business debt. A business budget can also help you identify your income sources, fixed costs and variable expenses.

If you’re falling behind on monthly payments, revisit your financial plan and adjust for unexpected changes in cash flow.

It’s also important have a plan B in case of an emergency, such as a major supplier or customer goes bad, advises the Bank Doctor, Neil Slonim. “This could involve having a back-up plan like access to cash from a family member or friend, or an alternative lender,” he says.

SMEs should also consider automating the follow-up process on late payments.

Renegotiate terms with vendors

Almost everything in life is up for negotiation, so make sure you talk openly with your vendors and make arrangements that suit everyone. Once the negotiation is finalised, put it in writing and ensure the contract matches the verbal agreement.

Consider asking your vendors to extend payment time from 30 days to 45 to smooth out any lumps in your cash flow. You could also opt for quarterly payments for power and water, and start payment terms from delivery completion, rather than part-delivery.

Optimise your inventory

Looking for ways to optimise your inventory can have a staggering impact on supply-chain performance, your balance sheet and cash flow.

This can be as simple as regularly reviewing purchase prices with suppliers and asking for discounts when requesting a quote or placing a new order. Alternatively, you might get a better price by buying smaller quantities more frequently.

Bear in mind that the right inventory optimisation approach depends on your business type, operations, warehousing and distribution strategy.

Consolidating loans

If you’re struggling to manage your debts, it might pay to roll all your loans into one, as this could mean paying less in fees and interest. Start by speaking with your credit provider about coming to a new arrangement. Switching home loans could also save you money, but be sure to read the fine print.

SMEs should consider alternative lenders when investigating loans, Slonim says. “You should also prepare for higher interest rates by making sure your profits are sufficient to comfortably cover the cost of debt at rates of 2 per cent or 3 per cent higher than current levels, he says.

“Also, arrange limits with your financier which allow for some headroom,” Slonim says. “But not too much, because you don’t want to be paying for credit you don’t use.”

Invoice finance and factoring

Debtor finance – also known as receivables finances, invoice finances and factoring – refers to a business using unpaid invoices as collateral for a cash advance of between 75 per cent and 90 per cent of the amount owed.

This finance facility usually works by a business entering into a factoring or invoice discounting arrangement with the lender, both of which are secured against the unpaid invoices of a business.

Advances are usually made within 48 hours, giving a business access to quick cash. A business then repays funds when the outstanding invoice is paid in full. This method does cost more than traditional forms of funding, but can be a viable short-term fix.