How to deal with business debt without hurting your credit score?

As a business owner, you require constant cash to fund your needs. However, delays in client payments, a lack of a sale period, and a drop in product demand affect revenue. You lack enough cash to finance the immediate need. Thus, you check the instant cash options to fund your requirements. However, such aspects come with a payback duration. Not doing so leads to a debt trap. Most of all, it significantly hurts your credit score. A low rating affects your chances of qualifying for affordable loans and credit cards.

Leaving your debts untouched may not help. Instead, analyse the best strategies to get out of it. It may be challenging for you, given the current circumstances. However, you can surely consider some aspects to release the debt burden.

What not to do while paying debt?

Before knowing how to pay the dues, let’s understand the aspects that you must avoid during the process. It is important as it will hinder the aim of getting debt-free as a business owner. Here is what not to do when paying off debts:

1) Avoid taking up new credit cards

No matter how useful a credit card may seem, avoid it until you repay the debt. You don’t want to have another debt looming over before you pay the existing one. Moreover, it may affect the credit limit that you get for usage.

• Spending money aimlessly

Each business expense should meet the immediate business requirement or need. Analyse how a particular expenditure contributes to the business’s growth. Can you delay it until you clear the debt? Focus on only the most important expenses for the time being. Otherwise, it may lead to business failure later.

• Missing payments

It is the last thing you would like to encounter on your credit report. Missed payments increase your liabilities on a debt. You eventually need to pay more for the same aspect.  Thus, direct debits should be set up to repay the dues in a timely manner.

6 Strategies to Deal with Business Debt in a credit-friendly Way

Now, you know the aspects that might affect your possibilities to get debt-free quickly. Let’s analyse the parameters and strategies that may help you repay the business debts without worries. You can pay business debts without hurting your credit score. Here is how:

1. Identify and set the budget

Analyse the debts you owe and the amount you can fairly pay. For example- if you owe £100000 in total, how much can you pay on each debt? Considering the debt count as 8, you must pay at least £12,500 (average) on each to get rid of the liabilities. Thus, check how much you can pay.

If you cannot pay in full, pay the minimal amount. It may differ according to the creditor’s policy. Thus, talk it out and then calculate your total amount to pay again. Next, set the budget by eliminating the extras. Check what aspects may help you cover the amount you need to save per month. Keep your expenses low during this time.

2. Consolidate the dues

Merging your business debt into a single payment mode is one way to get debt-free. You can do it either by using a debt consolidation loan or a balance transfer credit card.  However, the interest on a credit card is higher than a loan. It lets you transfer all the debt on the credit card to a single card. Alternatively, a debt consolidation loan grants you flexibility to choose the debt to consolidate. It is generally ideal to merge the debts with the highest interest and penalties.  

You may get one despite your poor credit history. Identify the best debt consolidation loans for bad credit in the UK with no guarantor requirement. It lets you merge your debts at a better interest than a usual loan. Moreover, you don’t need to provide a guarantor or personal guarantee to qualify. Instead, your repayment potential helps you get one quickly.

However, before getting one- check whether you have the latest bank statements, client portfolio, and an updated business plan. You must not have any heavy debt that may affect your loan approval.

3. Pay the minimal amount

Long periods of non-repayments affect your credit score. It attracts additional penalties and increases the credit utilisation ratio. Thus, your credit rating falls drastically. As mentioned above, if you cannot pay the full amount, pay the bare minimum. Check how much amount you are comfortable paying on some debts.

You must establish the right balance of full and part payments. For example- if you struggle with debts like bridging finance, check whether you can pay only interest costs. However, you must repay the principal amount later.

Debts	Monthly instalment(in pounds)	The minimum amount you can pay (in pounds)
Business loan	3000	2200
Credit cards	7000 (average)	5000
Office renovation loan	12000	8000
Total	22000	15,200

 So, it is better to pay some amount than nothing on the debt. Moreover, the interest costs and penalties further make it impossible to clear the debt. This arrangement also prevents your credit score from the worst damage.

4. Avoid paying secured debts immediately

You may have secured debts in the form of – a mortgage, bridging finance, or renovation loan. These are long-term loans that come with a repayment period of 8-25 years. It thus makes up an important part of your credit history.

Such loans and regular payments help you build a positive credit length. It is important to ensure a good credit score. Thus, if there is still a long time to repay such dues, let it be. Just continue the basic payments instead of clearing them off.  Otherwise., the credit score may fall significantly after payments. It is due to the loss of the credit history that you build over the years with the debt. However, your credit may begin improving later.

5. Prequalify before applying directly

It is the basic aspect that every business owner should follow while seeking loans. Applying with multiple loan providers at a time hurts credit. It also hampers your chances to get a loan. Therefore, while dealing with the best aspects of settling dues, avoid this. Always pre-qualify with the loan providers. It grants you an approximate of what you may get.

Check business finance with no credit check requirement. It helps you get the basic quote without affecting your credit score. Credit providers only analyse basic finances instead of performing detailed checks. Thus, it prevents you from an additional liability while clearing the debt.

6. Keep a safe bucket for emergencies

Usually, you spend the most under uncertain financial situations. It could be any business emergency, such as an instant cash need. Here, you use your credit card to withdraw cash. It turns out to be the most expensive mistake. It destroys your credit score, and you may be surprisingly high on this initiative.

Thus, it is better to save some cash safe just for emergencies. You can do so by saving it as an emergency fund. You can begin by saving a fixed and small amount initially.

Alternatively, check affordable options to get quick cash, like instant cash loans for your needs. It is ideal for the purpose and is easy to maintain. You always know the total you must pay to clear the dues. It eliminates the guessing work, making it easier to budget for. However, having an emergency saving bucket may help you avoid it.

Bottom line

Startups and enterprises dealing with unmanageable debt face difficulties in clearing it. You can begin by analysing the total debt amount. Check how much you can pay and negotiate with providers. It may help you pay less than what you owe.

Later, you may seek help from debt management plans. Alternatively, debt consolidation is the best way to reduce your liabilities drastically. Check which strategy works for you better, given the capital and the dues.