Which is better? One manageable debt? Or many small bad ones?
Uncontrolled indebtedness can be a serious business problem. However, there is a strategic solution. Instead of constantly increasing new debt simply to pay off old debts in a vicious spiralling circle, debt consolidation can return many businesses to investment and growth.
Better financial control
Borrowing can be easy. Less easy is paying back debt and making your money work harder.
However, a trend detected recently by our team at Shire Professional Funding is a rise in applications for finance from companies that are already quite heavily indebted.
This might reflect a rise in confidence. However, while it may make sense during a period of low interest rates, we have to remember that rates do and almost certainly will rise again.
Fortunately, there is often a safer and more profitable way of resolving corporate debt problems, many of which are unplanned and often creep up on busy businesses.
Put your eggs in one basket and watch that basket!
As the Shire's business development manager, part of my brief is to promote solutions to major business problems. In this case that is cost-effective debt consolidation.
Professional managed debt consolidation is designed to replace many small bad debts with one single manageable larger debt.
The results can be immediate and game-changing. Monthly outgoings fall. Cash flow improves. No further short-term loans are usually needed.
Strategy debt consolation can also help to realign business aims and open up new options. Freed up credit can be redirected to more profitably business opportunities.
And there is one other by-product for many worried business owners... a sound night's sleep!
Why businesses borrow
Financial borrowing is a perfectly normal business function.
However, when interest payments start to climb, borrowing limits are breached, cash flow cuts interrupt business activity and the cost of finance causes strain, consolidation may be necessary.
To understand how many businesses reach this point, it is important to understand how debt accumulates.
Almost all businesses borrow for sound commercial reasons. Young companies need start-up funding. Established firms may experience cash flow fluctuations for totally legitimate reasons.
Other examples include bridging loans while new business contracts are being finalised. In some instances, pay outs from routine legal cases cause delays.
In large businesses, it is common practice to spread costs out over the financial year.
Other reasons for extra borrowing can be unexpectedly high costs, or additional stock purchases.
The totals often mount up quickly.
Other types of borrowing
There are other reasons for business borrowing.
One is to provide liquidity to make tax and VAT payments. Extra cash flow may also be needed as working capital where liquidating assets or stocks is not practical.
Opportunistic asset buying, plus expansion and refurbishment projects, can also be funded by debt finance.
However, when the debt tail begins to wag the bottom-line dog, it is often time to think of consolidation.
Warning signs
We haven't seen high interest rates rises for many years.
However, experience tells us that they can and do happen again. It doesn't take much for the Bank of England Monetary Committee to raise borrowing rates. Mortgage rates then rise in parallel.
These are risks many ordinary businesses are not well prepared to face.
Most businesses also have professionally estimated borrowing limits. Pushing past these is unwise. Alarm bells should begin to ring.
Stronger credit record
Another logical reason for debt consolidation is to reduce the impact made on credit searches by lenders, supply chain companies and customers. It is best to prevent this as early as possible.
Otherwise, not only may many important business expansion plans need to go on hold, the strain of servicing an over-sized overdraft can also become a business risk.
Allowing costs to rise higher than they need to be is bad practice.
What is consolidation exactly?
Consolidation is defined as the rescheduling of business finances, normally in favour of taking out a new loan to pay off a number of liabilities and consumer debts that are generally unsecured.
The aim is to combine multiple debts into one single secured loan that can be serviced on more favourable pay-off terms, such as a lower interest rate, lower monthly repayments, or both.
This can quickly free up lines of borrowing for more profitable uses, such as expansion, stock buying and refurbishment
Shire Professional Funding
As a specialist finance provider, the Shire team works closely with accounting firms, which is why we have a close partnership with Premier Accounts and Consultancy.
We believe it is important to assess a business customer's finance needs with an open mind to ensure they get financial products best suited to their circumstances and liabilities.
Because every business is different, we take a proactive consultation approach. That means talking to you in personal detail and outlining a full range of options whenever possible.
If you would like to talk to us, please contact either me, Katherine, or the Premier team.
Katherine Tierney, Business Development Manager, Shire Professional Funding Limited
T - 01827 300353 - ext 353
E - Katherine.Tierney@shirepf.co.uk
W - www.shirepf.co.uk
