If you’re an entrepreneur, sole-trader or small business owner, small business debt is probably a fact of life for you.
You’re not alone, it’s almost impossible to grow a business without borrowing.
Following the financial crisis of 2008 and more lately the Coronavirus crisis of 2020, two trends have emerged which could be adding to your financial burdens:
- Firstly, since the credit crunch access to mainstream lending (primarily bank loans) has declined, driving more people to high-cost credit such as payday loans
- Secondly, personal unsecured debt levels have soared to record levels
For business owners, these trends have proved particularly costly.
Chartered Accountants French Duncan predicted in 2019 that a record 20 business failures per week in Scotland.
To help you stay in business without your debt spiralling out of control, you need to consider your priority costs, ensure you’re taking advantage of tax credits and expense allowances and only borrow responsibly. That might sound overwhelming but we’re here to help with 4 steps to get you started:
Step 1: Prioritise your business costs
The first step towards getting your house in order is to clarify what your priority business costs are. These are the basic payments you must make just to keep your business in operation. These costs will vary depending on your business services are, but they may include:
- Mortgage payments or rent on your business premises
- Business vehicles (if you travel to jobs) and their associated costs
- Tax, VAT and National Insurance
- Utility bills
- Leases on equipment
- Unpaid Fines
- Court judgements
Citizens Advice’s priority debt calculator is a great tool to help you tailor this list to the needs of your business.
Step 2: Get quality funding
When you’re starting out, your top concern is probably funding. We have spoken previously, with concern, about the growing use of high-cost credit – specifically payday loans. To reiterate, turning to high-cost loans is dangerous, but also entirely unnecessary. Good quality alternative finance is available both in a personal and business context. Be it through the growing trend of crowdfunding and peer-to-peer lending, or the use of local credit unions as we recently advocated in our Clear your debts like a Pro article.
Financing your business is no longer a case of petitioning your high street bank. Finding the right funding, best fitted to your business is simply a case of knowing where to look. Here are some highly recommended key resources.
- Funding Options: this is an invaluable Treasury owned search tool, which based on specific criteria aims to rank over 50 providers of a variety of grants and loans in order of suitability to your business
- If you are looking into grants over a loan, the good news is that in Scotland alone there are over 220 grant types This guide from smallbusiness.co.uk details the most popular ones.
- Business Gateway offers a broader range of support and services – including over 30 online resources dedicated to business financing.
Step 3: Make friends with HMRC
Self-management of your taxes can be a daunting prospect even if you’ve been in business for a long time. The key to a good relationship with HMRC is communication.
Ensure you keep HMRC in the loop with correct, up-to-date information about your business’s income and expenses. If you don’t, there’s a chance that your tax bill may be over-estimated. This not as uncommon as it may sound following the start of the new tax year and the introduction of new tax codes.
If you find yourself in a position where you’re struggling to make payments, keep HMRC up to date with your situation. Otherwise, they may jump to the conclusion that you are avoiding payment altogether. Contact your local office and explain to them. You can even make an offer to pay off the debt at an amount you can afford. If they agree that you can’t afford to pay in one lump sum, they may accept your offer to pay in monthly instalments.
Step 4: take advantage of tax allowances
Running your own business can become all-consuming. It is therefore unsurprising that most small business owners do not find the time to investigate all possible tax credits and exemptions they’re be entitled to. Here are three tax breaks which may save your business thousands each year:
- Research and Development tax credits: R&D tax credits are worth looking into even if you don’t initially feel like you would qualify. HMRC defines R&D very broadly, and thousands of software, design, architecture and engineering businesses doing no laboratory work benefit from these reliefs
- Employment Allowance: If you have employees (even a few), the Employment Allowance could reduce your National Insurance bill by £3000 a year. If your application is successful, no National Insurance is payable up to the £3000 limit. For most small businesses, this would eliminate the entire bill
- Use of Home Claims: HMRC allows generous tax savings for small businesses operated from home. For example, you can claim for a proportion of heating, mortgage interest, broadband, landline telephone and even council tax costs.
These are just the tip of the iceberg when it comes to making savings in the tax minefield. Bytestart offers a comprehensive guide here for further reading.
Has your Business Debt become unmanageable?
If you are in an increasingly unmanageable position, a Protected Trust Deed could be an option for you.
A Protected Trust Deed is a legislated debt solution in which you could write off unaffordable debt, reduce your monthly repayments to one affordable sum all while protecting the things you love.
However. there are a couple of important factors to consider first:
- As a sole trader, your income probably fluctuates month to month. This requires closer collaboration with your trustee to ensure the projections used to calculate your monthly contribution are fair and accurate
- If your business and personal bank accounts are held with the same bank, you will need to open a new business account with a different bank before the trust deed begins
- You will not be able to access further business borrowing for the duration of the Trust Deed.
- The general rule is that you can’t be the director of a limited company unless the terms of your Trust Deed allow it.
We are FCA approved and our expert advisers have helped over 16,000 people like you, out of debt.