Shaun Barton, partner at Company Closure, explains how firms can ensure they have a firm grasp on their debt and borrowing
Debt is not necessarily a bad thing for a company. When used correctly, it can allow a business to accelerate its growth plans, enter new markets, and increase its level of output.
This is particularly relevant to those within the aviation industry where essential equipment can be extremely expensive to obtain and can be simply unaffordable if relying solely on the capital reserves of the business to fund these purchases.
However, when debt becomes unmanageable and a company is no longer able to comfortably service its liabilities, problems can quickly start to mount.
It is therefore important to ensure you have a firm grasp of any debt or borrowing your company obtains, and make it a priority to regularly revisit your liabilities to ensure they remain serviceable both now and also in the future.
Assess your current level of debt – Debt has a habit of spiralling out of control and it can be easy to accumulate more and more borrowing over time.
By keeping a close eye on your current liability levels and placing these alongside your business’s incomings can help you keep a careful grasp of your overall financial position and ensure you don’t overburden your company with unmanageable levels of debt.
Consider future borrowing needs – When managing your company’s debts, it is important not only to consider your existing borrowing, but also any borrowing you envisage needing to take out in the future.
Planning ahead can help ensure you select the most appropriate type of funding for your business, as well as give you the opportunity to build these future repayments into your cash flow.
If you know how much you can afford to take out ahead of time, you are much more likely to be able to keep on top of these repayments when the time comes.
Ensure you are borrowing in the most cost-effective way – Depending on when you took out your borrowing, you may be able to explore whether there are now more cost-effective funding options.
This could well be the case if you originally took out the borrowing when your company was in its infancy or when it had a limited credit history.
If your company is now more established, you may find there are more lenders now willing to engage with you perhaps at lower interest rates.
This could involve consolidating several loans into one monthly repayment, or refinancing an existing agreement onto a lower interest rate.
Consolidation or refinancing could save you a substantial amount of money over the length of the term of the loan if done correctly.
Explore alternative funding options – Make sure you are borrowing via the most appropriate channel for your needs.
While a commercial loan may work better to fund a one-off purchase, a form of invoice finance may be more appropriate for longer-term cash flow financing needs.
If your need for finance has changed since you originally took out the borrowing, it is advisable to check in and make sure you are accessing the most appropriate source of funding.
Not only could this save you money, but it could also ensure the finance is better geared towards your needs.
Have a plan in place for repayment – While borrowing may be required to provide the necessary short-term boost to your finances, long-term this debt will eventually need to be repaid.
Be clear about how you are going to achieve this and consider prioritising repaying those debts which are costing you the most money.
The sooner you can repay what you owe, the sooner you can start channelling the money you are currently using to service your debts towards other areas of the business.
About the Author
Shaun Barton is a partner at Company Closure and boasts a wealth of experience in helping directors of distressed companies understand their options. A director-facing adviser, Shaun is often the first point of contact for business owners in financial distress, consistently delivering expert advice when it is needed the most.
