Most – if not all – people will encounter debt at some point in their lives. In fact, the average household in the UK now owes a record amount of £12,887, even before mortgages are taken into account, according to figures from the Office for National Statistics (ONS). It sounds counterintuitive to say that debt isn’t always bad, but the truth is there are two ways to separate debt. Take university, for example, you’re likely to have to pay off your student loan for years to come, but for many the pros of continuing education outweigh the cons of getting into debt. Taking out a mortgage is the same, because it enables you to invest in your future, but racking up credit card debt because you’re a shopaholic, is not. The same can be said for business debts; not all of them were created equal.
Good business debt
Investing in your own business is an example of a debt that’s considered ‘good’. It can be expensive to get your own venture off the ground, so many budding entrepreneurs choose to take out a business loan to cover some of the initial costs. Some may consider funding their company through equity instead; there are pros and cons to both of those options. If you’re planning on taking out a loan then ensure you have a watertight business plan that is backed by thorough market research; this will give you an assurance that you’ll be able to repay the loan (and make a healthy profit too!)
You may find yourself at another crossroads when you start to grow. You may decide to carry out research and development (R&D) into a new product, for example, in which case you’ll need the funds to be able to pay for intellectual property protection. Buying a franchise, purchasing bigger premises or carrying out a renovation are further instances of when you may choose to go into debt.
Bad business debt
A bad business debt generally occurs when you owe money to a creditor that you can’t pay – or a debtor owes money to you that they can’t pay. The latter commonly occurs when the debtor has gone bankrupt, or their business is going into liquidation. A debt recovery service may be used to chase any unpaid invoices, however, there may be situations when the money cannot be repaid and therefore the business has to write it off. Our Debt Recovery service is operated on a no win, no fee basis, with a live dashboard which can be used to review the progress of any outstanding debts, and alert users to any changes to the debtor company’s credit status.
How much debt is bad and what impact can it have on my business?
The FSB (Federation of Small Businesses) conducted its own research into financial risk in the UK and found that the average sum owed to a business in 2015 was £31,901. Shockingly, one in four SMEs go bankrupt if the average sum outstanding grows to £50,000.
We also carried out a survey last year which looked into the topic of late payments and bad debt. The survey found that 68% of businesses have had to deal with late payments in the past and 53% have had to write off bad debts in the past. You can read the full results here: http://hub-new.companycheck.co.uk/finance/financial-risk/.
What shape are my finances in?
Many of our customers use Company Check to measure the health of their own business’ finances. Not only we can provide reports and graphs which plot your assets and liabilities over time, but our Credit Risk score is particular helpful in helping you determine how likely your firm is to become insolvent over the next 12 months.
What can I do about bad business debt?
If you do find yourself in debt then know that there are plenty of places that can help. Business Debtline is a free debt advice service for the self-employed and small businesses in England, Wales and Scotland. Their dedicated team of advisors are available during weekdays from 9am-5.30pm, or you can use their webchat service.