Small Businesses and Debt

Debt is a major concern for any business owner whether you are running a small start-up business or a large well-established company. But sometimes it is difficult to know which loans to pay off first. Creditor's who shout the loudest may get your attention but these are not necessarily the best people to pay off first so make sure you plan your debt repayments rather than just having a knee-jerk reaction to the creditor applying the most pressure. According to finance specialists Solution Loans, that is true whether the loans are from a mainstream bank, short term loans, guarantor loans or alternative finance such as bad credit loans

This article highlights how to prioritise debts but if you are in the unfortunate position of not being able to make your loan repayments at all then seek free advice from places such as the Money Advice Service or any of the other free, confidential debt advice services.

For those of you running your own business and just struggling to know which loan repayments to make first remember that your top priority debts may not be the largest amounts but there are certain creditors that you really should pay first in order to avoid serious problems such as having your utilities disconnected or losing your business premises or even your business. Nobody wants to be made bankrupt because of a small unpaid bill.

So items such as rents, taxes (income tax and VAT), gas, water, electricity and phones bills have to be the top priority. After that there are likely to be lower priority debts such as overdrafts and loans and a general rule for these is to pay off as quickly as you can the debt that is charging the highest rate of interest. If you can manage to pay more than the minimum monthly amount then do that – even a small overpayment each month can have a significant long term effect as the debt will be reduced faster and the amount of interest you have to pay overall will be less.

As the most expensive debts are paid down then you can gradually tackle the other, less expensive debts. But also, as your debt decreases watch out for it growing again – there can be a tendency to start spending again once the debt becomes more manageable or constantly living with an overdraft and forgetting that this is debt, and generally expensive debt at that.

Perhaps one of the hardest things about debt is making a start clearing them – it is so easy to build up large amounts of debt especially when you first start out in business and have all the costs associated with starting a business. But for a business to be healthy you will need to have a good debt management plan in place and that will include assessing the costs of all your debts and seeing if the interest rates can be reduced.

Don't forget to talk to an accountant for advice about managing your business debts. For instance switching banks can significantly reduce the cost of your overdraft or business loans even when you take into account any charges for doing so. If you have competitive rates for a loan already then overpay your contractual amounts whenever you can (watching out for any limits on how much you can overpay). For an overdraft – use it sensibly, remember it is effectively a loan and don't ever go beyond your overdraft limit as unauthorised overdrafts are one of the most expensive forms of borrowing money.

The author has written and published articles on a wide range of topics including Small Business Advice, Tax and Accounting, Interior Design, House Renovation and Project Management.