Indebtedness can be a millstone around the necks of both enterprises and individuals unless it is kept on top of. Given that the UK has enjoyed historically low lending rates for about a decade, being in debt hasn’t always constituted the threat to solvency that it used to. However, Bank of England interest rates have recently risen. Who knows when they might do so again? Note that the second half of 2022 is likely to see a new administration take over in Downing Street. This could mean that the Bank of England’s board is instructed to take more affirmative action to bear down on inflationary pressures. One way to do that is to take money out of the wider economy by charging more for borrowing.
Therefore, if you or your business is currently in debt, the time to clear it is as soon as possible before the costs of servicing the debt go up and you are potentially placed in an untenable position. If you want to get out of debt or – at least – have less debt at the end of the year than when you started, follow the guidance below.
Clear the Most Costly Debt First
Firstly, don’t see all of your debt burden as one thing. Personal loans, directors’ loans and credit card debts are all likely to be more costly than mortgage debt, for example. Therefore, you should focus on clearing the debt that is costing you most in interest charges, to begin with. Remember that you still need to meet the terms of other borrowing but overpaying high-charging creditors to clear your debt with them first will make sense in most cases.
Prioritise Essential Spending Only
Secondly, cut down on other areas of spending. Don’t take on new employees unless you need to replace old ones. Keep going with existing stock and machinery and defer future investments until your current debt is more sustainable.
Look Into Debt Consolidation
This doesn’t suit all businesses and individuals but it can make things simpler. By consolidating debt, you are effectively restructuring it. This might mean only needing to budget for one or two debt payments each month rather than dozens depending on how many creditors you currently owe money to.
Talk to Experts
The insolvency practitioners at Salient Insolvency are here to advise on specific measures you can take to improve any situation you face with cash flow. We can help to renegotiate with creditors to gain more favourable terms or to buy you a breathing space with repayments. This service is available to financial directors, business owners and individuals alike.
Consider Bankruptcy or a DRO
If you know that you simply cannot afford to repay all of your creditors, then getting out of the cycle of indebtedness with further and further interest charges applying on sums you cannot pay back makes sense. If so, insolvency proceedings may be the best route forward. Bankruptcy applies to business owners but a debt relief order (DRO) is often more suitable in the case of consumer indebtedness, such as rent arrears or store card debt.
