Debt problems are hitting the 9-to-5’s and personal lives of the UK’s business owners in ever increasing numbers. Now representing 15% of the British workforce, self-employed people are struggling with late payments, low and variable incomes and collecting money that’s owed to them. The result is rising debt – both business-related and personal, which can deliver a double-whammy of stress.
If this sounds too close to home, the first thing you need to realise is that you’re not alone (three quarters of self-employed people report debts of more than £30,000). And the second thing is that there is help out there.
If you’ve done even a little research, you’ve probably found that the financial world is filled with jargon and confusing terms. So let’s begin with the big one that’s placing a stranglehold on your business – starting with ‘liabilities’.
A straightforward definition of ‘liabilities’
A liability is a debt owed from one person/company to another person/company that is not the owner of the business. E.g. A debt that is owed to non-owners.
There are a wide-ranging number of liabilities for businesses, such as accounts payable, and payroll taxes payable.
For consumers who use credit, liabilities include credit cards, overdrafts, loans and so on.
For businesses, there are two forms of liabilities: current and long-term.
Current liabilities are those that are due in under 12 months; these include accounts payable, sales tax payable, payroll taxes payable and accrued expenses. Long-term liabilities include debts that are due more than 12 months in the future.
In some instances, a liability can be listed as both current and long-term if it a portion of it becomes due within the next 12 months.
How to reduce your liabilities
Step one: Reduce your trading costs
The most fundamental step to decreasing your liabilities is to reduce your day-to-day operating costs. This might include:
- Selling any unneeded assets (such as surplus equipment)
- Converting assets into liabilities (e.g. selling your assets to a finance company to lease back)
- Factoring your invoices – this can decrease the asset value of an invoice, and raise cash
- Using investments to repay your debts
Seek help from a free, impartial, but expert source of business financial advice if you don’t feel confident in tackling this step alone.
Step two: Increase income
There are three core ways that any business can increase its income:
- Increase sales – for example, through extra marketing activities, cross-selling, promotion on certain products, referrals and affiliate schemes
- Raise your prices
- Discover new sources – for example, through renting out unused office space, selling surplus stock, selling advertising on your website or social channels and securing commissions from other organisations
Step three: Restructure your liabilities
- Negotiate longer or scheduled payment terms with suppliers
- Replace your existing loans with:
- loans that offer a lower interest rate
- secured loans (replacing unsecured loans) to decrease the interest you pay
- guaranteed loans to decrease the interest you pay
- switch to repayments over a longer period of time
- consolidate your debts
- Defer tax liabilities (although this will require specialist tax advice)
Step four: Restructure your assets
Assets include everything that the business owns. Examples include: property, equipment, vehicles and land.
Restructuring your assets could involve:
- Selling unnecessary assets (e.g.: surplus/old equipment, vehicles etc.)
- Converting assets into liabilities (e.g.: selling assets to a finance company and leasing them back)
- Factoring your invoices (this can reduce the asset value of the invoice, but raise cash)
- Use investments or cash to pay your loans off
Step five: Find a sustainable debt solution
If the above steps aren’t practicable, or have a limited impact on your financial standing, you’ll need to seek out a debt solution suitable for your circumstances.
Contrary to common belief, this needn’t mean liquidating your business or facing bankruptcy.
An IVA (Individual Voluntary Arrangement) is a form of debt settlement. It allows you to repay both your personal debts and business debts over a period of time (either 5 years/60 months or 6 years/72 months), after which time any remaining amounts owed will be written off.
An IVA is a legal agreement with your creditors, negotiated via an IVA provider. This debt solution protects you from creditor action – such as litigation or forced bankruptcy.
You should always seek debt help advice from accredited experts prior to deciding on an IVA.