Knowing when your business is in debt and being honest with yourself about it allows you to act quickly in order to get the help and advice you need. In turn, this could ensure your business gets the opportunity to turn around, or to enter an appropriate insolvency process if necessary. But how do you can you know that you are well and truly in debt? There are 8 tell-tale signs, and once you notice them you need to act fast.
- Inability to meet financial obligations
One of the clearest signs that your business is deep in debt is probably an inability to meet your financial obligations from period to period. If you’re falling behind in making your lease, overheads, and loan repayments, it’s likely you’re overleveraged.
However, it could also be a sign that you’re experiencing cash-flow problems. If your cash flow cycle is healthy with accounts receivables up to date, and you still can’t meet your financial obligations, then it’s probable that you have a debt issue in your business.
- High cost of borrowing
Recent surveys have indicated that children who live at home receive $832 a year for their allowance. While there are no costs to receiving handouts from your parents, the story is quite different when it comes to a business borrowing money.
If your business borrowing costs are escalating, then this could be a sign that you have a debt issue. As the business owner, CEO, or company director, you should have a clear idea about exactly how much you’re paying to service your loans each month. As a general rule of thumb, if more expenses are going towards servicing your debt (paying interest rather than just paying down) rather than growing or running your business, you might have a debt issue.
- Low profitability
Low profitability could be a sign that your debt situation is beginning to affect your business. If your business experiences a drop in profitability accompanied by high debt servicing costs, all it might take is a low revenue season to set you back and create significant challenges to your solvency status.
- Being unable to secure financing
If you’re constantly being turned down for loans and debt, it’s time to reassess your debt situation and consider whether you’re overleveraged. Financial institutions and banks undertake rigorous checks before they will lend, so your inability to secure suitable financing can be just another sign that your debt situation is out of control. You need to review why the banks might be turning you down and what you should do to repair the situation.
- Inability to scale
Too much debt can make it hard for you to grow and scale in a sustainable way. The demand for your products or services is there, but you’re unable to fund your growth with your profit and/or loans. This could be because you need more funding and can’t secure it or because your profit margins are insufficient.
Either way, the root cause could be because you’re already overleveraged. In this case, you might need to consult with financing experts to explore ways to obtain more financing, or you might need to grow in a more sustainable way if taking on more debt presents too much risk.
- Cash flow problems
Always being short on cash flow can be a strong indicator that you’re over leveraged. You have little liquid assets because you’re using up your money as it comes in, some it on servicing your business debt. In this case, you need to reassess your outgoings and find ways to reduce operating expenditure so you successfully meet your debt obligations and maintain a level of cash flow that’s healthful for your organisation.
- Borrowing to repay
Borrowing to repay your debt is a clear sign that your business debt is out of control. If your business isn’t generating enough revenue to cover your going debt obligations, it’s time to reassess your overall strategy and seek advice.
- Debt-to-asset ratio
Your debt-to-asset ratio can tell you a lot about your debt situation, and if this fundamental metric is rising rather than falling or remaining stable, you might have a debt problem on your hands. Look to reduce debt and operations costs, pay down debt, and consolidate your debt products.
Getting your business back on track
Some of the options for turning around your business once you’ve identified a high-debt load include cutting costs, selling assets, and negotiating better loan-repayment and supplier-payment terms. Every business should have a strategy for paying down their debt and reducing their debt load. You can and should take the time to explore your choices, but don’t delay seeking expert advice.
Insolvency experts can assist you with exploring your options and coming up with strategies that allow you to return to profitability. Alternatively, they might guide you on putting your business into voluntary administration to give your business some breathing space, or even on wind down your business and repay creditors if that’s the best option.
Getting your business back on track after accumulating a high level of debt is possible, but you need to seek advice as soon as possible. Acting quickly gives your business the best chance of successful recovery.