Manage your debts, say the experts: "Credit can be useful to people starting a business," says Consumer Credit Counselling Service spokeswoman Amy Brown. "Debt is not necessarily bad - most people have debts of some kind, including mortgages. But if creditors are becoming a problem, then you need to face up to the problem and seek help to work out your payments."
Cashflow problems have caused many a small business failure: "People with assets worth far more than any debts that they had accumulated have been bankrupted simply because they were unable to meet their debt repayments on the date due," argues John McQueen, founder of The Bankruptcy Association.
"The odd missed or late payment is not a problem if the debtor is able to 'catch up' with their payments. A business has a problem when they miss a payment and are unable to 'catch up'."
Improving cashflow can help, says Business Debtline. Meet late payers to discuss payments and bad debts, and consider accepting payment in instalments. Where invoices are disputed, you can ask for the non-disputed part to be paid at once while you sort out difficulties over the rest. You can also claim statutory interest on late payments from businesses, and could consider court action.
Take free and confidential specialist advice. Consider paying business rent, rates, water rates and utilities bills monthly to help you budget. Check your tax code, and whether you are eligible for Working Families Tax Credit or Housing Benefit.
Contact your bank, showing them your business and household budget and a list of your debts. Show a business plan with projections for sustaining recovery over the next year and more. Ask for a better finance arrangement to sort out existing cashflow problems, but beware of any moves to change unsecured borrowing to a loan secured on your home.
Most small businesses have irregular or seasonal incomes, so consider a flexible mortgage which will give you repayment holidays for several months. Consider health insurance or critical illness cover.
Keeping in touch with creditors is crucial, say experts. When you have paid your priority debts, there may be little left for secondary debts including credit cards, store cards and unsecured borrowing. Draw up a list of what you owe each, add the sums up, and find the total. Work out what you can afford to pay each month. You can then offer to make reduced payments on a pro rata basis, paying proportionally more to creditors you owe more to.
Debt counselling agencies will help with this. They suggest you write to each creditor with your budget sheet to explain that you are having difficulty trading, and offering a reduced payment. You can also ask that interest is frozen so that payments will reduce the actual debt.
Many creditors will accept this arrangement, and you can write to the creditors who do not to tell them that other companies have agreed. Start paying anyway: As Business Debtline points out: "Most financial institutions are members of a trade association and have agreed a code of practice. This says they should be sympathetic in cases of genuine difficulty. Remember most creditors would rather you pay a small amount rather than nothing at all."
Using bank borrowing and credit to drive a business forward is commonplace, and it is vital to take expert advice on negotiating with creditors before temporary difficulties become permanent ones.
For further advice, contact:
Business Debtline: 0800 197 6026
The Bankruptcy Association: 01524 64305
The Consumer Credit Counselling Service helpline: 0800 138 1111