5 Strategies To Avoid Your Business Going Into Debt

February 2, 2023
Photo by Monstera from Pexels

Avoiding debt requires your business to establish a solid financial plan. Below, we’ll be discussing five ways your business can steer clear from falling into the hole of debt…

In the UK, 33% of small businesses have debt levels more than 10 times their cash balance. Acquiring bad debt can have disastrous consequences for your business and, if you’re unable to pay on time, you may need to seek the help of commercial debt recovery solicitors.

However, there are plenty of practical things you can do to reduce your company’s chances of ending up in debt. This can include setting up effective commercial policies and financial planning.

For more information on how to avoid your business going into debt, keep reading…

1. Set up an Emergency Business Fund

While it can seem daunting, saving for an emergency business fund can help with the unexpected. It’s advisable to cut out a percentage of profit until you have enough to cover up to six months of expenses. While this may seem like a lot, having a considerable amount of money saved means you can continue investing in your business during times of hardship.

Ultimately, having an emergency fund can bring peace of mind that comes with knowing you have a safety net in place.

2. Credit Check New Investors and Clients

Delayed payments and debt can be a genuine threat to the existence of a number of small businesses. In the UK, small businesses are owed an estimated £51.5 billion in unpaid invoices.

Carrying out a credit check on new clients and investors is a common part of due diligence in business. The check is held at the beginning of a business relationship and can help you assess any potential risk factors. This can include their financial history and payment behaviour to spot any red flags.

There are a range of companies that specialise in credit checking for businesses, including Experian and Credit Reform. Commissioning a credit check from one of these bureaus is the most accurate way to gain insight into a potential client’s financial history.

While attracting new clients is important for business, not receiving payment on time or at all can have devastating consequences for your company’s cash flow.

3. Have Clear Terms and Conditions

Terms and conditions establish a legally binding contract between a business and its clients. It will cover things such as commercial transactions, invoices, and payment terms.

Clearly stating your business’ terms and conditions will mean you can establish strong boundaries with clients. For example, you could have a term where you charge interest on late payments if appropriate. Having these boundaries will reduce your business’ chances of acquiring any bad debt.

4. Send Invoices Promptly

Timing is everything when it comes to invoices. As soon as your service or product is delivered, it’s important to send your invoice.

Fast invoicing provides clients with a timeline. If a client processes their invoice quickly, then it will turn into a faster payment. A smooth transaction also saves you time and will also turn into a quicker cash flow for your business.

Falling back on invoices can be devastating to a business as they can pile up pretty fast and can delay your cash flow. In worst cases, this could lead to your company acquiring some debt.

Keeping up to date with invoices can also help you monitor your company’s finances more efficiently. Sending invoices in a timely manner will help you gain insight into your business’ transactions as well as help get an idea about the quality of your company. Ultimately, this could help business growth in years to come.

5. Set Up a Company Budget

By budgeting your company’s monthly expenses, you can gain a greater understanding of where money is going and where you can afford to spend it. A budget will cover the following:

· How much money you have spent.

· How much money you have leftover.

· The revenue you need to make.

· What you have allocated for expenditure to create revenue.

· The amount of money you will need to secure in the future. This will be based on sales and profit.

Moreover, having a budget can also help you gain insight into how well your business is performing. This means you can then make informed business decisions on staff, expenses, office premises and much more.

If your business sticks to its budgeting plan, you’ll be less likely to incur any bad debt. But, if you do, a budgeting plan can also help you manage this debt.

Avoiding Business Debt

Bad debt can have disastrous consequences for your business cash flow. It is therefore important to have procedures and planning in place to ensure that you mitigate the risks of incurring any debt. These things can include, sending invoices on time, holding credit checks on potential clients, and having a budgeting plan.

If you find that your business has acquired any outstanding payments, it’s important to contact a commercial solicitor. A lawyer can help assist with your credit control, court proceedings and debt recovery.

Please be advised that this article is for general informational purposes only, and should not be used as a substitute for advice from a trained legal professional. Be sure to consult a commercial lawyer/solicitor if you’re seeking advice on debt recovery. We are not liable for risks or issues associated with using or acting upon the information on this site.

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