How to pay off business debt - a quick-start guide

Paying off business debt is proving to be a growing priority for many of the UK’s entrepreneurs.

A new survey from BRDC Continental has found that overdraft use amongst small businesses has dropped dramatically, from 25 per cent of businesses in 2011 to just 16 per cent in the third quarter of 2013. Meanwhile the Bank of England reports a collapse in overdraft lending in December, during which the biggest monthly drop in three years was reported.

Many small business owners want to find ways to pay off loans and overdrafts more quickly. So how can you clear your debts efficiently, without putting your business at risk?

1. Assess the situation

Your first step should be to make a comprehensive list of everything that you owe. This might be more complicated than it sounds. You should make sure that you include any outstanding payments to suppliers, as well as business loans, credit cards, and overdrafts. Many businesses also owe money to friends and family members, as this is a particularly popular means by which they can raise start-up capital. In your list, make sure that you include monthly repayments, total amount outstanding, and interest rates.

2. Look twice at your budgets

If you are to pay off your debts more quickly, you need to free up cash. Look again at your budgets, and try to identify potential areas for cost savings. Are you spending too much on acquisition? How can you streamline that process if so? What about overheads? Are you spending in the most effective way? By looking honestly at your budgeting you can help to make sure that you end up with the cash you need to pay down your debts.

3. Use the snowball method

The snowball method is a popular means by which consumers and businesses might be able to pay off debt more quickly. You can use this method if you have more than one debt. Use your budget to identify how much spare cash you have each month with which to make overpayments. Then, put all of that money towards the debt with the smallest balance. Once that has been settled, use that extra cash plus the money you were putting towards the debt you’ve just paid off, to begin settling the next smallest debt, and continue until you have settled all of your accounts. This can be a highly effective way of paying off what you owe more quickly.

4. Renegotiate

You should also consider getting in touch with your lenders to see whether you can negotiate a more favourable interest rate. If you have a good history of payment you may find that lenders are willing to, for example, switch you onto a better deal in order to minimise the amount that you are paying for your debt. This can help you to settle the outstanding amounts more quickly and more cheaply.

5. Build a funnel

Finally, it bears reiterating that if you are trying to pay down your debts as quickly as possible, you should funnel all of your extra cash towards doing so. At the same time, though, you should make absolutely sure that you are not diverting so much cash to your debts that you can no longer meet your other obligations. Similarly, you should think very carefully before dipping into any ‘slush fund’ in order to pay your debts.