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Business debt

27th January 2022

Published by The Real Debt Guy

  • Financial Problems in Business
  • Cashflow
  • Credit Management
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5 Ways to Overcome a Financial Crisis in Business

4 tips to help prevent financial difficulty in business

Starting your own business can be an incredibly rewarding and satisfying way to make a living. All your precious time, effort and hard work is going towards something that is 100% for you and your loved ones. No more taking a small cut, working every hour under the sun for someone else to get rich!

It could be something as small as a part-time side hustle or as large as running a fulltime business with several employees. It’s easy for anyone to start a business today or so it might seem. However, a lot of people go into business without a sound understanding of how to run a business from a financial perspective.

If you are thinking of starting your own business, or you already have, the likelihood is you have, or will, make several mistakes. Managing your finances in terms of credit doesn’t have to be one of them.

Let’s take a look at four important tips to reduce the risk of your business falling into financial difficulty.

Not in the mood to read? We got you covered. Listen to the rest with the YouTube link at the bottom of the page.

Tip One - Credit Checking

When it comes to doing business, it doesn’t matter who you are dealing with. It could be a big brand like John Lewis that everybody trusts, your Uncle Dave’s business, or Debbie that you’ve been friends with for years. Always check their financial situation. This isn’t just a case of checking how their company is currently performing. You need to look carefully at the history of the business, particularly the director, or directors.

Let’s explain that a little further...

A supplier was considering offering a manufacturing business 30 days credit terms.

After an initial credit search on the business, it looked very healthy indeed, and more than suitable to offer these terms.

However, after a deeper look into the directors, they soon discovered the business had only one director who had run three similar companies previously. For each of the previous companies, on the fourth year of business, the director resigned and a new director was appointed to replace him. The business then went into administration owing large sums of money.

A coincidence? Maybe. A safe business to offer these credit terms to? Not really. Whether this unusual pattern was intentional or a huge coincidence, it wasn’t worth the risk.

If you are not getting paid before you provide goods or services to a customer, you are providing credit terms. It’s important you understand that.

Tip Two: Credit & Friends

Often in family run small businesses, you find a lot of outstanding payments are based on trust. Business owners have long lists of names, all ‘mates’ that they can vouch for, who will pay up. Business is business and if someone is deliberately not paying you for your goods or services, they’re not a true ‘mate’ or friend. A true friend would pay what they owed.

The truth is, these business relationships always start with the best of intentions, but there is a risk that if something happens to that relationship, it will impact your business. It’s important to make sure a barrier exists between you, and your friend when it comes to business and money. Where possible, make sure someone else has the task of chasing up the payment, particularly if you are uncomfortable doing this.

By taking this professional approach you’ll find that payment comes in faster than you anticipated and your friendship is protected.

Tip Three – Take all or part of the money upfront

If you are running your own business, or working for yourself, the easiest way to protect yourself financially, is by taking as much of the funds up front as you possibly can.  You should aim for the bare minimum to cover your costs. As a small business this is critical, it means your costs are at least covered. When we talk about “costs” this doesn't just mean cost of goods, this includes the cost of your time.

Taking steps like this can prevent a situation where non-payment could put you directly at risk. For small businesses particularly, there are only so many setbacks it can survive before running into financial issues that it may never recover from.

There may be times where you are required to accept certain terms in order to win business from a larger company. If this is the case, try to negotiate more favourable terms and remember to do a thorough credit check.

Every business has expenses, whether it is employee costs, material costs or services. Make sure all these costs are covered at the very least.  Even better, take more than you need to cover these costs....full payment ideally!

Try and avoid making allowances for friends or family on this one too.

Tip Four – Getting to the top of the payer list

Every business has a mental list of companies (or people) they need to pay and the order of the importance.  For example, the taxman, utilities companies, or key suppliers that are critical to the business functioning.

Companies at the top of the list sit here because if you don’t pay them, the outcome can be detrimental. With the taxman you risk legal issues. With utilities there is the risk of being disconnected. Without your key suppliers your entire business could just stop.

To give yourself a greater chance of being paid - and on time - you need a credit management process. No matter who you are dealing with, you must follow the process and act accordingly. No exceptions.

Here’s an example of a Credit Management Process:

Stage 1 - Your invoice is due in 30 days. On the 31st day you haven’t received payment. You must act on it. Contact the company that owes the money straight away and ask for immediate payment.

Stage 2 - If after 7 days you haven’t received payment. Contact the company to warn that you will be taking recovery action.

Stage 3 - 7 days after Stage 2 you still haven’t received payment. Contact the company and warn them that you intend to take legal action.

Stage 4 - 14 days after Stage 3 you may want to proceed with legal action.

Your credit management process doesn’t have to be exactly this, but it gives you an idea of what it could look like. The key is to make sure you have a process in place and that you stick to it.

You’ll find that people will pay at different stages of the process, but with time, you’ll notice there is a change. Instead of sitting at the bottom of the list, you have now become a priority. Paying you is no longer an option; it is a necessity in line with your credit terms.

Don't forget to read The Real Debt Guy's final thoughts below!

The information in this article is considered to be true and correct at the date of publication.

The Real Debt Guy's final thoughts.

Whether you are just starting out, or your business is struggling with cashflow, these four tips could really help reduce the risk of your business falling into financial difficulty.

It is key your business is taken seriously and your hard work deserves to be paid on time (if not early!) and in full.

If you can implement these four tips into your business, you will notice a considerable improvement to your cashflow and a likely injection of cash from outstanding debtors.

You might also find it useful to check out the ‘Business’ section of the website, to help build your knowledge and confidence when it comes to dealing with the financial side of your business.

Simplifying complicated matters.

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