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You may be struggling with utility bills, considering selling your assets to make ends meet or facing uncertainty about how to cover costs for your small business. Whatever the financial question you are currently asking yourself, debt may at one point or another have been an answer. Therefore “How will I pay what I owe this month”, has become a widespread concern when it comes to managing debts in the middle of the current pandemic.
Understandably, the ability of many business to repay outstanding debts has been severely affected by COVID-19. According to the Brookings Institute, Micro, Small & Medium-sized Enterprises (MSME) in Uganda have struggled sticking to scheduled loan repayment terms. Up-to 25% of small enterprises, 36% of medium-sized enterprises and 8% of large enterprises have defaulted in paying their loan in the last 3 months[1]. The situation is mirrored across the East African region. Despite government initiated liquidity interventions, businesses are accumulating debts and struggling to pay them.
There is an old African proverb made popular by Chinua Achebe that says “A debt may get mouldy, but it never decays”. That is an adequate description of the debts that many small businesses are currently accumulating. Time might pass, but the debts will not go away and if these debts are not controlled, many small businesses will be greatly impacted.
The extent of the impact depends, to some extent, on the steps that you take to manage your cash flow. Below are 10 useful tips that can help you take control of your business’ debts.
1. Understand Your Situation and Take Action
The first step in the journey of taking control is to understand your situation. Information of your business’ finances, how much you owe and how much you are paying per month, should be at your fingertips at all times. To achieve this, ledgers and other financial records whether in hard copy or soft are essential.
It is also as important to be honest with yourself about your business’ financial situation because as Chinua Achebe said, a debt does not decay.
2. Prioritize your Payments
Your priorities should depend on your type of business and also country-specific legislation on debt repayments. The following are a few suggestions to go on your list of priorities:
i. Payroll – Your work force is one of the lifelines of your business. It is important to pay them first to ensure you keep their morale up and reduce the risk of business failure.
ii. Taxes – Government legislation will usually accord priority in ranking to taxes due to the Government. Your business should equally prioritize repayment of Government taxes.
iii. Suppliers and business partners – Retain goodwill with your most loyal suppliers and business partners by paying them next.
iv. Aged payables – Protect your ability to borrow money in the future by paying aged debt first to ensure your business does not get a negative credit rating.
v. Bills – Outgoing costs such as rent and utility bills need to be paid to keep business running for revenue generation. The generated revenue will help you repay any other outstanding debts.
vi. Secured debts – Protect your business’ assets being seized or being held personally liable for your business’ debt by making repayments for secured debt.
vii. Insurance – It is necessary to make payments for these to limit your business’ future exposure which might derail your current debt management plan.
viii. Credit cards – Avoid penalties or interest charges as these can pile up quickly.
3. Increase your Revenue and Reduce Costs
Digital transformation and other tweaks to your business and operational models could help sustain your business during the COVID-19 pandemic. It is important to revisit your business model and see which changes need to be made to enable your business circumvent the supply and demand challenges that have been caused by the pandemic.
It’s equally important that, as you increase revenue, you should also assess your business’ cost centers to identify areas in which reductions may be made. Some cost reductions you can consider are:
Reducing the amount of space you rent or lease, especially where a majority of your staff can work from home.
Making some staff redundant but ensure that these redundancies do not affect your operations.
Negotiate with suppliers to make payments later.
4. Offer your Customers Mark-Downs or Reduced Prices
This may sound counterintuitive to revenue generation however, offering discounts to your customers is one way of improving your business cash flow position. The discounts will increase sales and thereby generate revenue for your business.
5. Discuss more Favorable Payment Terms With Creditors
Communicate with your Creditors. Meet in person where possible or call as an alternative and renegotiate the terms of the payment where possible.
Help your Creditors understand why it is necessary for them to renegotiate the terms of repayment, i.e. that your business’ survival means more business for them in future. Don’t forget to communicate with them all through the newly agreed repayment period and to be proactive to their needs.
6. Renegotiate Bank Loan Terms
You may be able to renegotiate your bank loan so that it is spread over a longer term, to reduce the interest payments and also the monthly repayment cost.
The bank may charge a higher interest rate for elongation of time of repayment and the increased perceived risk of default however, this additional time will give your business room to generate the revenue needed to repay the loan.
7. Refinance Debt
Seek the services of asset reconstruction companies or investment banks to refinance your business’ debt. Refinancing allows you to enter into more flexible terms of repayment.
8. Look For New Investors
You can raise cash for your business by issuing your company’s shares for sale, however with this form of financing, a business owner may lose control of their business.
Other opportunities under this option include merging or amalgamating with another like business to benefit from the economies of scale of merging.
9. Liquidate Assets
Assets that are not primary to operations can be sold to repay debts.
10. Make use of Insulations Under Insolvency Laws
If all else fails, a bankruptcy or winding up order by a Court provides a business immunity from further litigation for failure to make loan repayments. The business might however go into administration or may be liquidated to ensure that the business’ creditors’ claims against the business are satisfied.
CONCLUSION
Effective debt management is foundational to any further strategies your business is considering to use to counter the challenges posed by the COVID-19 pandemic. Effective communication with your creditors and a good plan of repayment will enable your business to take control of your debt situation and survival during the pandemic.
To learn how to practically implement the above tips in your organisation, get in touch with us here
[1] Corti Paul Lakuma & Nathan Sunday “Impact of COVID-19 on micro, small, medium businesses in Uganda”, Brookings Institute, 2020 https://www.brookings.edu/blog/africa-in-focus/2020/05/19/impact-of-covid-19-on-micro-small-and-medium-businesses-in-uganda/ accessed on 5th July 2020
The Author
Moses Ngorok is a Management Consultant at AfriBusiness Consulting Uganda Limited, with over 8 years’ experience as a Legal Adviser to Banks and other forms of businesses.
