Debt Management Guides

History of UK Business Debt - the number of small business insolvencies is forecast to significantly increase over the next few years. How has this difficult economic period come about so suddenly, taking so many by surprise and what can business owners do about it?... During the last twenty years millions of new start up small businesses has been created as a result of a favourable business climate; economic stability, the exposition of readily available credit and the relaxation of regulatory regimes. These elements have helped to create the stimulus for entrepreneurs to build profitable businesses and create wealth. Through the boom years the number of self employed individuals risking their own money (or borrowing to finance their dream), increased dramatically in the UK and in the USA. Most owners simply wanted to escape the rat race and seek a more flexible lifestyle and control their own destiny. During the 1990's and through the millennium, western economies have enjoyed stable and consistently high growth and historically low interest rates. Business confidence remained high and investment in plant, machinery and infrastructure rose in key industries like telecoms, commercial property, retail and financial services. Property investment and speculation on share markets meant a growth in the disposable income of small business owners. Consequently, more and more individuals felt confident about the economy and decided to leave their nine to five routine and start a new business. Yet, nearly all new businesses need capital to begin and sustain the business until it can grow sufficiently....

Boom and Bust - to cater for an increasing number of small business entrepreneurs, banks, loan companies and mortgage lenders recognised the changing cultural trends and responded accordingly; people could now afford to borrow relatively cheap money in the form of unsecured loans or secured loans (usually secured against their personal home or other personal assets). Thousands of readily accessible new personal and commercial lending products were created. Banks provided easy online applications and, in branches, they provided a helpful 'small business advisor', (whose primary measure of success was to lend businesses money). As the internet increased in usage and sophistication, financial comparison sites merged that enabled thousands of mortgages, investments and loan products to be compared and purchased instantly. A huge number of financial incentives were created to increase customer borrowing, from free valuations on mortgages, to air mile points on personal unsecured loans. Worryingly, lenders starting incorporating an automatic credit history report into the online loan application procedure. Loan companies were now able to offer credit to businesses and individuals from their websites or over the telephone from call centres around the world. The culture of risk and reward was fostered by the policies of Governments around the world.; their primary goal was stable economic growth via small business tax incentives, market deregulation (such as European Union treaties) and privatisation in sectors like telecoms, utilities, financial services and travel. At the same time they did little to tighten commercial mortgage lending affordability controls or quantify levels of bad debt in the booming commercial and housing sector. In the good times, mortgage borrowing was not regulated or capped, relative to individuals personal incomes. By 2008, the level of individual personal debt for unsecured loans, including credit cards, stood at £220 billion in the UK and a staggering $2.2 trillion in the United States.

Global Market Volatility - during this period of growth, businesses of all sizes have had to cope with market uncertainty, market volatility and a constantly changing market environment; competitive threats from foreign imports, foreign skilled workers; online threats to traditional bricks and mortar businesses as well increased stock market volatility... History has now shown that the introduction of new Government rules and procedures (through legislative market regulation), has not kept up with the pace of major business events. For instance, the accounting scandals and frauds of Bearings Bank, US Savings and Loan and Enron created sharp falls in stocks and shares, while denting future confidence and credibility. Despite tightening up of regulatory checks and balances following these events, further unexpected market shocks such as the UK based Northern Rock collapse occurred which regulatory controls did not identify in time.

The Credit Crunch Bites - this long period of growth has turned to decline more recently, as a range of different global factors have simultaneously conspired to create what is now commonly referred to as the credit crunch. Soaring oil and food prices from growing economies like China and India help push up inflation in the West. While consumers struggle to cope with the rising cost of living, the credit crunch meant banks are even nervous to lend to each other. Major banks have increased inter-banking interest rates and tightened lending criteria to the public. Some smaller banks, mortgage lenders and loan organisations could not (or have chosen not to) continue to re-finance some high street business lending. Consequently, both commercial property and the already over valued residential housing market have collapsed, as the reduced money supply strangles business confidence and new investment. To make matters worse, cash strapped consumers and the business world have reduced household spending and business investment. These factors have caused indebted consumers and business alike to spend and invest less.

Business Failures - as a result, millions of cash strapped small businesses are now in serious difficulty, and many are considering closure or failing completely. When businesses fail, business owners need to act responsibly and swiftly to limit the damage. The first step is to recognise that insolvency is approaching and debt management measures have failed. There are two simple accounting based tests to determine whether or not a business is insolvent. The first is the 'Cash Flow Test'. This is the inability to repay business debt when the debt is due. Secondly, there is the the 'Balance Sheet Test'. This is the point at which liabilities of the business are greater than the value of its assets. A successful and solvent business runs its balance sheet on a 'going concern' basis (in accordance with formal accounting procedures). The main reasons for business failure are weak competitive differentiation, lack of management skills and experience, lack of funding, poor cost control and bad debts from trade customers.

Cashflow is King - an increasing number of SME's are using debt invoice factoring and credit repair services in order to facilitate their debt management plans. Factoring is where a company outsources or 'factors' the credit of unpaid customer bills to a third party institution, in exchange the unpaid business debt to be paid immediately. This has the effect of speeding up cash flow as well as potentially reducing debt collection administration costs. Rather than have money tied up in unpaid billing invoices, it is released and optimised as cash for good use elsewhere in the business. For new and inexperienced new businesses, this service can provide an insurance policy against bad debt and a useful alternative to balancing cash flow and smoothing financial planning. Other firms are trying to shorten the time they take to collect unpaid invoices. Without the proper credit control skills, processes and systems, inability or failure to collect late payments can have a devastating impact. Here, negotiating with current larger customers and vetting the credit history of prospective new trade customers is an essential process.

Business Debt Consolidation - one of the debt management solutions for cash stricken business owners is to refinance debt. The positive flow of cash through any small business is the lifeblood of survival; business suppliers and employees expect payment on time while customers are increasingly interested in interest free offers and favourable credit terms themselves. Business debt consolidation is the conversion of an existing debt into new debt instrument. Widely advertised as a simple manageable solution, all debts are consolidated into a business debt consolidation loan with an 'easy to manage' monthly payment and lower interest. This debt management solution of course does not remove the debt, it merely stabilizes the problem. The purpose is usually to reduce the average interest rate and short-term cash debt repayments, while attempting to reduce the overall total cost of the business debt. Refinancing loan schemes from commercial and mortgage lenders, provide company directors and sole traders with the opportunity to achieve a better market deal and a new set of terms. Unfortunately, some business owners have simply taken on too much historical debt or consolidated too far. In these cases, an increasing number have no choice but to opt for formal a insolvency process, such as company voluntary arrangement or even administrative receivership or liquidation.

Personal Debt Situations - from a personal perspective, because over 60% of UK business owners have signed personal guarantees to obtain loans and credit in the first place, (typically against equity in their home), an increasing number are opting for debt management type schemes such as an Individual Voluntary Arrangement (IVA). These are a written contractual agreement, formalised between the two parties, stating that a debtor can resolve their indebtedness via a lower series of debt repayments, agreed over a fixed period. An IVA is a form of Debt Management Plan, which is a negotiated settlement for a reduced regular amount (or a lower lump sum) is agreed between the debtor and creditor. To fight off failure many owners have resorted to personal debt consolidation. This involves obtaining an unsecured or personal loan that replaces all existing forms of existing unsecured borrowing such as credit cards, personal loans, overdrafts, store cards, hire purchase and so on. For those who could not cope other forms of debt management exist. Similar to an IVA, an administration order is where the individual is expected to make repayments directly to the court. The court then redistributes this money to creditors on behalf of the individual. In more serious situations business people are opting for personal bankruptcy. Bankruptcy is when an individual who cannot pay his debts when they are due, and therefore formally agrees to surrender all his assets and income, in exchange for that debt being forgiven. In Scotland this process is know as sequestration. Many self employed people are cutting back on their personal expenditure and looking for more money saving tips to reduce their monthly outgoings.