It can be difficult to navigate the financial environment, particularly if you or your company is already in debt. Securing additional funds might seem challenging, but with the right strategies, it is possible to find the support you need.
This article explores various methods to secure business funds even when debt is a concern.
An Overview of Debt and Business Financing
Debt is a common part of both personal and business finances. A MarketWatch article states that Americans are carrying a record household debt in 2024. The overall debt increased by 4.8% from November 2022 to the same month in 2023. Credit card debt had the highest increase of 16.6%.
The same has been the case with small and medium-sized enterprises (SMEs). Data from Statista shows that only 28% of SMEs had no outstanding debt, while 7% had more than one million debt in 2022. It was also found that:
- 13% had a debt of less than $25,000
- 8% were indebted between $25,000 to $50,000
- 10% of the SMEs were in a debt of $50,000 to $100,000
- 17% were indebted with $100,000 to $250,000
- 16% had an outstanding debt of $250,000 to $1,000,000
The situation is common even in the UK. A research study shows that the debt of SMEs grew by 61% in the UK. It increased by £6312 to reach £16,641 in 2023 from only £10,329 in 2022.
Business financing involves obtaining funds to support operations, expand, or manage existing debts. The secret is to handle debt sensibly so that it doesn’t impede the expansion of the company. Making wise judgments may be aided by knowing the various forms of debt and how they affect the financial stability of your company.
You should also consider ongoing business expenses and taxes. Proper planning ensures you understand your financial obligations and can create a strategy to meet them. Paying your taxes on time keeps you free from fines and interest, which can otherwise make your debt worse. Both aspects are crucial for maintaining financial health and avoiding additional debt.
You can enlist the assistance of a qualified tax expert to manage the accounts. As stated by 5 Rivers Accountancy, they can connect with you as dedicated tax advisors. Since they will have the right experience and skills, they will be able to understand and address your unique needs. This can help you turn obstacles into opportunities and captivate them.
You may locate the ideal tax expert for your small business in a number of methods. For one, you can connect with your business network to find out if they can give you a referral. If not, you can search Google for terms like accountants near me for taxes to find a list of professionals close to your business premises. This will connect you with local service providers who will be easily accessible as and when required.
Self-Assessment and Debt Management
The first step in securing funds while in debt is conducting a thorough self-assessment. Examine your present financial status, taking into account your debt load, interest rates, and terms of payback. This evaluation will provide you with a comprehensive view of your financial situation and point out any areas that require work.
You should then focus on managing your existing debt and how you can bring business funding into it. Sort high-interest loans into priority categories and make a payback schedule that fits your company’s financial flow. This approach helps in reducing debt and demonstrates to potential lenders that your business is committed to financial responsibility.
Another important way to manage both debt and cash flow is by paying installments on time. A Barclays report found that around three in five UK businesses made late payments and were owing money due to it. This, in turn, fueled financial stress and cash flow problems.
Creative Funding Solutions
Exploring creative funding solutions can be a game-changer for businesses in debt. Take into account alternatives such as invoice factoring, in which you sell your invoices to a third party at a loss in order to receive cash right away.
Crowdfunding is an additional choice in which a large number of individuals contribute modest amounts of money, usually through online platforms. These options might provide you with the money you need without increasing your debt load.
Additionally, forming strategic partnerships or seeking investment from venture capitalists can inject capital into your business while offering valuable expertise and connections.
Government Grants and Loans
Grants and loans from the government can be a lifesaver for companies drowning in debt. Grants are particularly beneficial as they do not need to be repaid. Look into the federal, state, and local grants that your company may be eligible for.
Furthermore, in comparison to conventional loans, government-backed loans frequently have better conditions and cheaper interest rates. These loans may be utilized for a number of things, such as debt refinancing, which can lessen the financial strain on your company.
Let us consider the example of the US. Financial support tailored to microbusinesses is available through the Small Business Administration’s 7(a) loan program, for example. The maximum loan amount you can receive through this program is $5 million. However, it is enough to get you out of any problematic situation or get your business going.
Business Planning and Budgeting
A solid business plan and strict budgeting are essential when seeking funds while in debt. Your business plan should outline your current financial situation, goals, and strategies for growth. A thorough budget that keeps track of all revenue and spending should also be included.
Demonstrating to potential lenders or investors that you have a clear plan can significantly increase your chances of securing funds. Maintaining and modifying your budget on a regular basis can help your company stay on track and fulfill its financial commitments.
Alternative Financing Options
Alternative financing options can supply the required finances when traditional loans are not an option. Lending money to companies on a peer-to-peer basis is a feasible alternative. Compared to conventional bank loans, these loans frequently have more accommodating conditions.
Microloans, which are little loans intended to support small firms, are an additional option. These loans can give you the money you need to manage debt and expand your business, and they are usually easier to apply for. Investigating these choices may provide access to fresh sources of funding that don’t have the strict standards of conventional lenders.
Maintaining a Strong Credit Score
A strong credit score is crucial when seeking business funds, especially if you’re dealing with debt. Your credit score is a major consideration when approving a loan since it shows how financially responsible you are. To keep your credit score high:
- Keep your debt levels low
- Make sure to pay your bills on time
- Regularly check your credit report for errors
Addressing any inaccuracies promptly can prevent them from negatively impacting your score. A strong credit score improves your chances of securing funds and also leads to better loan terms and lower interest rates.
Frequently Asked Questions
How do you overcome debts in business?
Examine your finances, make high-interest repayments your first priority, and look at peer-to-peer financing and grants as ways to get out from under company debt. Pay your bills on time to maintain a good credit score, and make frequent budget adjustments to efficiently balance your income and spending. To make well-informed selections, consult an expert.
What is the advantage of raising money for a startup using debt?
There are several benefits associated with debt finance. To begin with, the lender is powerless over your company. Your connection with the financier ends when you repay the debt. You can deduct interest from your taxes after that.
Do startups prefer debt or equity?
If you want a little sum of money, debt financing may be a more advantageous choice. However, equity financing can be your best option if you want a sizable sum of money. What development stage are you in? Finding investors who are prepared to take a risk on your firm may be challenging if you’re a startup in its early stages.
Securing business funds while facing debt is challenging but not impossible. By understanding your debt, managing it effectively, and exploring various funding options, you can find the financial support needed to keep your business thriving. Government grants, creative funding solutions, and alternative financing options provide valuable resources without exacerbating debt.
A well-crafted business plan and strong credit score further enhance your chances of securing the necessary funds. Your company may pay off debt and go further with careful planning and wise choices.